BILL ANALYSIS
AB 676
Page 1
Date of Hearing: May 4, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 676 (Jeffries) - As Introduced: February 25, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: consumer status: destination
management companies
SUMMARY : Designates a qualified destination management company
(DMC) as a consumer, and not a retailer, of the tangible
personal property (TPP) it provides a client under a qualified
contract for destination management services. Specifically,
this bill :
1)Defines a "qualified DMC" as a corporation that:
a) Is substantially engaged in the business of providing
destination management services. (The term "substantially"
is defined to mean that 80% or more of the business' gross
sales are derived from the provision of destination
management services.);
b) Is not doing business as a caterer;
c) Maintains a "permanent nonresidential office in
California which [sic] the destination management services
are provided";
d) Has three or more full-time employees;
e) Expends 1% to 3% of its gross revenue annually to market
California and local destinations for tourism;
f) Does not own any equipment used to provide destination
management services, including dance floors, decorative
props, lighting, podiums, sound or video systems, stages,
or equipment for catered meals. (This condition does not
apply to office equipment.); and,
g) Does not provide services for weddings.
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2)Defines "destination management services" as the provision of
four or more of the following services:
a) Transportation;
b) Entertainment;
c) Meals;
d) Recreational activities;
e) Tours;
f) Registration; and,
g) Staffing.
3)Defines "qualified contract" as a contract between a qualified
DMC and its client for destination management services that
meets all of the following conditions:
a) The client is a corporation, partnership, limited
liability company, trade association, or other business
entity principally located outside of the county in which
the destination management services are provided. (The
client cannot be an individual, social club, or fraternal
organization.);
b) The client is responsible for paying the qualified DMC
for all the destination management services provided;
c) The qualified DMC is responsible for paying all the
vendors that sell or lease TPP to the qualified DMC for the
contract services, including vendors' charges for sales tax
reimbursement or collection of use tax; and,
d) The destination management services "occur in part, or
all, of two or more consecutive days".
4)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any sales and use tax (SUT)
revenues lost as a result of this bill.
5)Provides that it is the intent of the Legislature that this
measure is declaratory of existing law.
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6)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
gross receipts from sales of TPP in this state.
2)Imposes a use tax on the storage, use, or other consumption in
this state of TPP purchased from any retailer for storage,
use, or other consumption in this state, absent a specific
exemption.
3)Designates the following entities as consumers, and not
retailers, of specified TPP they use or furnish in the
performance of their professional services:
a) Licensed optometrists, physicians, pharmacists, and
registered dispensing opticians;
b) Licensed veterinarians;
c) Licensed chiropractors;
d) Specified garment cleaning establishments that received
no more than 20% of their total gross receipts from the
alteration of garments during the preceding calendar year;
e) Licensed hearing aid dispensers; and,
f) Producers of X-ray films or photographs used to diagnose
human medical or dental conditions.
FISCAL EFFECT : The Board of Equalization (BOE) estimates that
this bill would reduce state and local revenues by approximately
$360,000 each year.
COMMENTS :
1)The author states:
Currently, the legal staff at [BOE] has taken the position
that any and [all] services provided by [DMCs] that are
related to food and beverage service are subject to
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California sales tax; essentially making them retailers of
food and beverages. This creates two very basic problems:
(1) restaurants will not accept resale exemption
certificates from DMCs and (2) DMCs do not have liquor
licenses. Furthermore, the California Alcoholic Beverage
Control Board (ABC) has said that it will not issue liquor
licenses to DMCs because DMCs do not have stand-alone
business premises that serve alcoholic beverages.
As a result of the confusion, there is a need to have DMCs
statutorily defined as 'consumers' rather than 'resellers'
for purposes of sales tax. This solution will permit DMCs
to charge for their creative services without the fear in
the future that the transfer of incidental [TPP] in the
course of the event will jeopardize their status [as]
independent service providers.
2)Proponents state, "[DMCs] are incorporated, independent
service providers that market, promote and showcase California
as a tourism and meetings destination to associations and
corporations and provide full service detail planning to their
clients." Furthermore, proponents state, "There are
approximately forty-five DMCs in California today, most of
which are small, women-owned businesses. DMCs have operated
for nearly 40 years as independent service providers. DMCs
have always been treated as independent service providers by
[BOE]. For the past forty years, BOE considered DMCs to be
the consumers of any [TPP] incidentally acquired to create
client programs. To resolve the issue, AB 676 clarifies that
DMCs continue to be deemed consumers, rather than resellers,
for purposes of sales tax."
3)BOE notes the following in its analysis of this bill:
a) "Other event planners' business activities are very
similar to the activities of DMCs. They also design,
coordinate, plan, produce, and manage special events for
individuals and groups. These event planners go by many
different titles, including conference and meeting planner,
convention coordinator, festival organizer, wedding
planner, special event or occasion organizer, and trade
show planner. The type of services and items they provide
varies depending on the event they are planning, and
include the following: 1) advertising and marketing, 2)
furnishing of food and beverages, 3) planning and providing
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of entertainment, decorations, security and parking, 4)
coordinating travel, transportation, and hotel
accommodations, and 5) hiring, supervising, and training of
support staff."
b) "Under current law, other event planners like DMCs are
treated similarly to a caterer when providing meals, food
and beverages. The event planner is making retail sales of
these items and any charges for services related to the
furnishing and serving of the food and beverages are
subject to tax. Since other event planners' business
transactions are very similar to DMCs, should the bill be
amended to give them the same tax treatment?"
c) "Along the same lines, Board staff notes that the bill
would essentially give preferential tax treatment to
qualified DMCs. Qualified DMCs would not be liable for
sales tax on their retail sales of food and beverages,
including any mark ups associated on such sales. DMCs
would also not be liable for sales tax on their charges for
planning, designing, and coordination that are made in
connection with the sale of food and beverages.
Consequently, other event planners may believe they are
being unjustly treated and may question why legislation was
enacted that gave special tax reporting privileges for
qualified DMCs over all event planners."
d) "Other businesses have fees and charges for professional
services that are related to the sale of [TPP] and subject
to tax. These businesses have to segregate their charges
for professional services directly related to the sale of
merchandise from charges for services that have no relation
to the sale of merchandise."
"One such example is interior designers and decorators, who
typically perform design, repair, reupholstering, color
coordination, and planning. They also sell merchandise
such as furniture, window coverings, carpeting, home
accessories, and samples. Their professional services
typically include consulting, design, layout, selection of
color schemes, coordinating furniture and fabrics, and
supervising installation. For interior designers and
decorators, tax applies to any charges for their
professional services that are directly related to the sale
of merchandise. Conversely, tax does not apply to charges
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for professional services that are not directly related to
the sale of merchandise."
"For these businesses, it's not always easy to determine the
point at which their professional services are related to a
sale and subject to tax or unrelated to a sale and
nontaxable. While enactment of this measure will simplify
the DMCs' tax reporting and record keeping, it could set a
precedent for other businesses whose business activities
also involve nontaxable professional services and taxable
services related to a sale."
4)Committee Staff Notes:
a) What exactly is a DMC? :
i) The Association of Destination Management Executives
(ADME) notes that a DMC is a "professional services
company" that specializes in the planning and
implementation of events, activities, and tours.
Specifically, ADME states that, "DMCs provide services to
Incentive Companies, which are generally affiliates of
large travel agencies, as well as to corporate clients
and groups. These services include extensive pre-program
planning and design, transportation services, arrangement
of tours and activities and arrangement of events
including theme parties or awards dinners." Finally,
ADME notes, "Typically, clients are billed on a per
person or flat fee basis, without the DMC specifically
showing the charges for the creative services."
ii) This bill defines a qualified DMC as a corporation
that is substantially engaged in the business of
providing "destination management services". The term
"destination management services", in turn, is defined as
the provision of four of more of the following services:
transportation, entertainment, meals, recreational
activities, tours, registration, and staffing. This bill
specifically provides that a qualified DMC cannot be
doing business as a caterer, or provide services for
weddings. Moreover, a qualified DMC must maintain a
permanent nonresidential office in California, have three
or more full-time employees and expend between 1% and 3%
of its gross revenue annually to market California and
local destinations for tourism. Finally, a qualified DMC
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may not own any equipment used to provide destination
management services except "office equipment".
iii) As BOE notes, under current law, event planners like
DMCs are treated like caterers when providing meals, food
and beverages. Specifically, BOE SUT Regulation
1603(h)(3)(C) provides that tax applies to charges made
by a caterer for event planning, design, coordination,
and/or supervision if those charges are made in
connection with the furnishing of meals, food, or drinks
for the event. Tax does not apply to separately stated
charges for services unrelated to the furnishing and
serving of meals, food, or drinks, such as optional
entertainment, or the provision of parking attendants and
security guards.
b) What would this bill do? : This bill would designate a
qualified DMC as a consumer, rather than a retailer, of TPP
it provides to a client under a qualified contract for
destination management services. Therefore, as BOE notes,
a qualified DMC would not be liable for sales tax on its
retail sales of food and beverages, or other items related
to the sale of food and beverages (e.g., centerpieces,
flowers, candles, ice sculptures, etc.). Moreover, DMCs
would not be liable for sales tax on their charges for
planning, design, and coordination that are related to the
sale of TPP. Rather, a DMC would be regarded as a consumer
of the TPP it uses in providing its services, and tax would
apply to the sale made to the DMC.
c) Service providers, retailers, and those in between : In
general, service providers are considered consumers of any
TPP incidentally transferred in providing their services.
As consumers, tax applies to the service provider's
purchase of TPP. BOE SUT Regulation 1501 provides that, to
determine whether a particular transaction involves the
sale of TPP or the incidental transfer of TPP in providing
a service, one must look to the true object of the
contract. That is to say, one must determine whether the
buyer's true objective was obtaining the service or the
property produced by the service.
d) A precedent for future legislation? : Committee staff
question whether this bill might inadvertently establish a
precedent for future bills. Indeed, there are a number of
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businesses in California that receive revenues from both
taxable TPP sales and non-taxable services. Should these
businesses also be considered consumers of TPP they sell,
if those sales are deemed "incidental" in nature? As
California's economy continues to shift toward the
service-sector, might this lead to an erosion of the sales
tax base upon which this state relies for revenues?
e) The effect of making this bill declaratory of existing
law : This bill states that its provisions are declaratory
of existing law. BOE notes that this provision is designed
to eliminate the liability of one DMC whose audit is
currently being held in BOE's appeals division, and to
eliminate the liability of several other DMCs that have
filed amended returns under the SUT amnesty program. If
this bill does apply retroactively, BOE estimates that it
could result in one-time revenue losses of up to $2.6
million.
f) Related legislation :
i) SB 1628 (Ducheny), introduced in the 2007-08
Legislative Session, contained provisions nearly
identical to this bill. SB 1628 was held in the Senate
Appropriations Committee.
ii) SB 700 (Ducheny), introduced in the 2007-08
Legislative Session, contained provisions nearly
identical to this bill. SB 700 was held in the Senate
Committee on Revenue and Taxation.
g) Proposed amendments :
i) This bill defines a qualified DMC as a corporation
that expends 1% to 3% of its gross revenue annually to
market California and local destinations for tourism.
Under a technical reading of this language, a business
would be disqualified if it spent more than 3% of its
gross revenue marketing California. BOE has suggested a
technical amendment to address this issue.
ii) This bill provides that a qualified DMC must
maintain "a permanent nonresidential office in California
which [sic] the destination management services are
provided." This bill also specifies, as a condition for
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a qualified contract, that the "destination management
services occur in part, or all, of two or more
consecutive days." Committee staff suggests amending
this language for clarity.
iii) On page 2, line 17, replace "an" with "a".
REGISTERED SUPPORT / OPPOSITION :
Support
ACCESS Destination Services
ACCESS Destination Services, Orange County
ACCESS San Diego
Arrangements Unlimited
Brier & Dunn
California Host
Corporate Diversions
Destination PROS, Inc.
Destination Services San Diego
Fun is First, Inc.
Mana, Allison & Associates, Inc.
National Tour Association
PRA Destination Management, Inc.
TBA Global, LLC
The Event Team
TMM (The Meeting Manager)
Viviani, Inc.
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098