BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 1087 - Ma
Amended: June 1, 2009
Hearing: July 8, 2009 Fiscal: Yes
SUBJECT: Requires the entire "shipping and handling" of a
product or goods to be subject to the sales tax.
EXISTING LAW, as dictated by the Sales and Use Tax
Law, imposes a sales tax on for the sale of tangible
personal property sold at retail which is based on the
gross receipts from sales of tangible personal property.
EXISTING LAW imposes a use tax on the storage, use, or
other consumption of tangible personal property purchased
from a retailer for storage, use, or other consumption
which is measured by the sales price of the property.
EXISTING LAW provides various exclusions from gross
receipts and sales price. One such exclusion are
separately stated charges for transportation or shipping of
merchandise from the retailer's place of business or other
point from which shipment is made directly to the
purchaser. The "handling" charges, however, are not exempt
from tax. Therefore, when a retailer charges "shipping and
handling" for an item the shipping may be exempt from tax
but the handling is not.
THIS BILL requires that the entire "shipping and
handling" amount be subject to the sales tax.
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THE BILL specifically states that if transportation or
shipping charges are not separately stated and are combined
with other charges, they are not excluded from the sales
price for determining the sales taxes due.
THIS BILL'S definition of "sales price" and "gross
receipts" excludes charges for transportation that are
separately stated as a single amount that does not combine
the transportation charges with other charges.
FISCAL EFFECT:
The Board of Equalization estimates this bill
would result in an annual increase in sales tax revenues of
$3.8 million, of which $2.5 million would accrue to the
General Fund and the remainder would accrue to special
funds and local funds.
There would be minor costs associated with the law
change which would be offset by a reduction in audits on
the shipping and handling issue.
COMMENTS:
A. Purpose of the Bill
Existing law requires retailers to impose the sales
tax on the "handling" charge of "shipping and handling" and
exempts the "shipping" from the sales tax if the retailer
has detailed records of the charges, such as a FedEx
receipt.
The sponsor of this bill, the California Retailers
Association, states that the current law is confusing,
inconsistent with other state practices and has lead to
class action law suits. Specifically, the retailers state
that in situations where the retailer does not keep records
that show the actual cost of the delivery, the BOE subjects
the entire delivery charge to the customer to sales tax.
However, several retailers that have charged the sales tax
under these circumstances have been sued in class action
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lawsuits for allegedly "over collecting" the sales tax.
This, according to the CRA, puts the retailer in a "no win"
situation.
According to the author, AB 1087 provides clarity for
shipping and handling charges and will greatly ease
administrative and audit burdens for both retailers and the
BOE.
B. An excuse to buy another pair of shoes (and an
example)
Most retailers charge their customers a fee for their
merchandise that includes the purchase price,
transportation or delivery costs. On most occasions, the
amount the delivery company charges the retailer exceeds
what the retailer charged its customer, resulting in no tax
being due. In the case in which the delivery company
charges the retailer less than the amount the retailer
charged the customer, this difference is not excluded from
the definition of "sales price" or "gross receipts" and is
subject to sales tax.
Typically, at the time the customer is completing the
transaction, the retailer has no way of knowing the exact
amount the delivery company will charge, thus preventing
the retailer from effectively collecting the proper sales
tax amount from the consumer.
For example, if I buy a pair of shoes from Nordstrom
and am charged $25 for "shipping and handling," only the
"handling" portion should be subject to the sales tax,
assuming Nordstrom keeps detailed shipping receipts. I, as
the customer, am not clear on what part of that charge is
subject to the sales tax but the retailer may only impose
the sales tax on handling charges as long as it keeps the
receipt. With my shoes, if the shipping charge is $10,
then I am only supposed to pay sales tax on the $15
handling fee. Under this bill, the entire $25 would be
subject to the sales tax.
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C. My pair of shoes confuses retailers, taxpayers and
sometimes the BOE
In order to determine whether the sales tax exclusion
applies, current law requires retailers and the Board of
Equalization auditors to review delivery charges on a
transaction by transaction basis to ascertain whether a
specific delivery charge is subject to sales tax and what
portion of the delivery charge is to be subject to the tax.
In situations in which the retailer does not keep
records that show the actual cost of the delivery, the
Board of Equalization subjects the entire delivery charge
to the customer to sales tax. However, several retailers
that have charged sales tax that includes transportation
costs have been sued in class action lawsuits for allegedly
"over collecting" sales tax.
The rules pertaining to taxation of delivery charges
have caused confusion among consumers, retailers, and the
Board of Equalization auditors.
The California Retailers Association (sponsor) states
that this bill would be more beneficial for small and large
businesses as well as the Board of Equalization because it
simplifies the process for excluding transportation costs
by clearly stating that actual shipping or transportation
costs are not taxable and all other items are taxable.
D. "Shipping and Handling:" Before & After this bill
Under existing law, if a "shipping and handling"
charge is not separated into a "shipping" charge and
"handling" charge, the Board of Equalization allowed a
retailer to show record of the cost of shipping, therefore
allowing the exclusion to apply.
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Under AB 1087, if a retailer did not separate the
shipping charges from the handling charges, it would still
be taxable regardless of the retailer's ability to show
record of the shipping charges. Thus, a "shipping and
handling" transaction would be taxable in its entirety.
In the case of reporting use taxes on a "shipping and
handling" charge, a consumer is liable for any out-of-state
taxable purchase that is not registered with the Board of
Equalization. The use tax is due on the sales price of the
property, and on any taxable shipping charges or other
service charges associated with the sale of that property.
AB 1087 simplifies the process of determining the actual
amount of shipping that the consumer may exclude from his
or her computation of use tax by subjecting the entire
charge to use tax.
E. Vote Requirement
The vote requirement for this bill was changed from a
2/3 requirement to a majority vote because this bill is not
meant to raise revenue but to clarify existing law.
This bill does raise revenue because, according to the
Board of Equalization, the ability to subject a "shipping
and handling" charge versus just the handling charge to the
sales tax would increase the tax base thereby increasing
revenue.
Retailers are still allowed to claim the exemption but
only when the transportation or "shipping" charge is
separately stated. Therefore, this bill changes the
administrative and reporting requirement but not the rate,
base or burden of the tax. Persons entitled to the
exemptions previously remain able to take the same
exemption as long as the documentation and invoicing
follows the "separately stated" requirement. Therefore,
this bill requires a majority vote.
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Support and Opposition
Support:California Retailers Association (Sponsor)
Oppose:None received
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Consultant: Gina Le & Gayle Miller