BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SBX6 5 - Hollingsworth
Amended: February 24, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Provides an exclusion from the computation of
sales and use tax the value of a vehicle traded
in for a new vehicle.
EXISTING LAW imposes a sales and use tax on the gross
receipts from the sale of tangible personal property,
unless specifically exempted by statute. Gross receipts
and sales price include the total amount of the sale, lease
or rental price, whether received in money or otherwise.
The total amount of the sale, lease or rental price
includes: 1) any services that are a part of the sale; 2)
all receipts, cash, credits and property of any kind; and
3) any amount for which credit is allowed by the seller to
the purchaser.
THIS BILL provides that the definition of sales price
and gross receipts does not include the value of a vehicle
traded in for a new vehicle, including a new motorcycle,
when the value of the trade-in vehicle is separately stated
on the new vehicle invoice or bill of sale or similar
document provided to the purchaser. This bill becomes
operative on the first day of the first calendar quarter
commencing more than 90 days after the bill is enacted.
SBX6 5 - Hollingsworth
Page 3
FISCAL EFFECT:
According to the Board of Equalization (BOE) SBX6 5
results in revenue losses of $326 million to the state, $14
million to the Fiscal Recovery Fund, a $108 million local
loss, and a $46 million special district loss, for a total
of $494 million.
COMMENTS:
A. Purpose of Bill
The author provides the following statement:
" SBX6 5 will provide a significant economic stimulus
to the staggering California economy. Recent years have
seen a serious decline in auto and motorcycle sales in the
Golden State. In an article entited, New car sales in
California plunged in 2009,The Sacramento Bee reported on
January 29, 2010 that sales of new cars and light trucks in
California declined 28.3% compared with 2008, and that this
decline was steeper than the 21.2% national average for the
same time period.
A story on Autotalk.com told how The Motorcycle
Industry Council reports a 40.8% drop in year-over-year
estimated sales since 2008. The MIC figures a total of
520,502 motorcycle sales for 2009, compared with 879,910 in
2008. ATV sales for the same period dropped 29.3%, from
454,098 to 321,181. MIC tabulates sales data by monthly
reports (January 21st, 2010).
Bringing California's tax code in line with other
states will provide an incentive for more dealers to open
shop here in California, and will attract more consumers to
local dealers. The boost in economic growth will pay off
greatly for both the state and local governments. Increased
new vehicle sales doppler through the state economy in the
form of increased discretionary spending on travel,
SBX6 5 - Hollingsworth
Page 3
lodging, tourism, and a host of other related
revenue-generating services.
SBX6 5 would create incentives for Californians to
purchase newer vehicles and motorcycles which are, on
average, safer and cleaner running than older models.
Expanded access to newer, more efficient cars and
motorcycles will make California a better place to drive.
Thus, SBX6 5 'spares the air', enhances highway safety,
stimulates commerce, and generates sales tax revenue."
B. Background
BOE's Regulation 1654, Barter, Exchange, and
"Trade-Ins," explains the application of tax to sales and
purchases involving "trade-ins." Subdivision (b)(1)
provides that the value of a trade-in of a used vehicle or
any other item of tangible personal property may not be
excluded from the computation of sales tax with respect to
the property being sold for which the trade-in allowance is
given. For example, if a dealer sells a new vehicle for
$20,000 and accepts a trade-in with a value at $4,000 as
partial payment, sales tax is still based on the $20,000
selling price.
Also, when merchandise is "traded-in" on the purchase
price of other merchandise, the retailer accepting the
trade-in must include in the amount subject to tax the
amount agreed upon between the retailer and the purchaser
as the allowance for the merchandise traded in. This is
true even in cases where no further money is required to be
paid by the purchaser in the trade. For example, if a
person brings a diamond ring to a jeweler and makes an even
exchange for a diamond necklace, the jeweler would be
required to report sales tax on the fair retail market
value of the diamond necklace.
C. Will a Tax Change for New Vehicle Sales be Effective?
SBX6 5 - Hollingsworth
Page 3
The California New Car Dealers Association states that
"since last year, the cost of new car purchases in
California increased 1.5% (1% increase in the sales tax
effective April 1, 2009 and a .5% hike in the VLF effective
on May 19, 2009). Basic economic principles dictate that
when the price of a good goes up, fewer are sold and
consumers will look elsewhere to spend their precious
financial resources. During the worst retail automotive
market in over a generation, new car sales in 2009 were
down 28.3% compared with 2008 and 2009 was the lowest sales
volume in California since 1975."
However, other economic factors contribute to
declining new car sales such as high levels of consumer
debt, households tapping into their savings to boost
spending, the slump in the housing market, and increasing
fuel prices. Furthermore, classic economic theory suggests
that the markets correct themselves and interfering
ultimately delays return to market equilibrium. Thus,
changing California's tax policy towards new vehicle
purchases does not necessarily address the reasons people
are not buying new cars.
Furthermore, the efficacy of this tax expenditure is
unknown. Perhaps those who have the financial ability to
purchase a new car during this difficult economic time
would do so regardless of the provisions of SBX6 5.
Similarly, those who do not have the financial ability to
purchase a new car most likely would not be able to even if
this measure were enacted.
D. SBX6 5 Excludes Other Commonly Traded-In Items
SBX6 5 sets a precedent to extend a sales and use tax
exemption for trade-ins for other durable goods. Other
SBX6 5 - Hollingsworth
Page 3
durable goods often traded in include: home and kitchen
appliances, furniture, copy machines, and jewelry. If a
car's trade-in value should be excluded from the definition
sales price and gross receipts, the Committee may wish to
consider the precedent set by the measure for other durable
goods.
E. Technical Concerns
The BOE has identified several technical concerns with
SBX6 5. Namely, the author may wish to consider defining
"vehicle" and clarify what qualifies as a "new vehicle."
Additionally, SBX6 5 provides no agreed upon methodology
for determining the value of the trade-in. Dependent upon
the bargaining position and power of the parties involved
in the transaction, the value of the trade-in could be
overestimated or underestimated.
Support and Opposition
Support:California New Car Dealers Association,
Alliance of Automobile Manufacturers
Oppose:None received.
---------------------------------
Consultant: Meg Svoboda
SBX6 5 - Hollingsworth
Page 3