BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 714 - Dutton
As Introduced
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Excludes the value of a trade-in vehicle from the
sales price when used for a new vehicle
EXISTING LAW
Imposes the sales and use tax on the gross receipts on
tangible personal property unless statutorily exempted.
The following chart shows the basic sales and use tax rate
for the state; in addition, cities and counties may levy
transactions and use taxes with a vote of the people for
either general or special purposes in that city.
-----------------------------
|Rate |Jurisdiction |
|-----+-----------------------|
|5.75%|State (General Fund) |
| | |
|-----+-----------------------|
|0.25%|State (Fiscal Recovery |
| |Fund) |
|-----+-----------------------|
|0.50%|State (Local Revenue |
| |Fund) |
|-----+-----------------------|
|0.25%|State (General Fund) |
| | |
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|-----+-----------------------|
|0.50%|State (Local Public |
| |Safety Fund) |
|-----+-----------------------|
|1.00%|Local (County/City) |
| | 0.25% County |
| |transportation funds |
| | 0.75% City and |
| |county operations |
|-----+-----------------------|
|8.25%|Total Statewide Base |
| |Sales/Use Tax |
-----------------------------
The total amount of the sale or lease or rental price
includes all of the following:
Any services that are a part of the sale.
All receipts, cash, credits and property of any kind.
Any amount for which credit is allowed by the seller to
the purchaser.
The BOE's regulation 1654, Barter, Exchange, and
"Trade-Ins," explains the application of tax to sales and
purchases involving "trade-ins." It 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.
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
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brings a diamond ring to a jeweler and makes an even
exchange for a different ring, the jeweler would be
required to report sales tax on the fair retail market
value of the different ring.
THIS BILL
Provides that the definitions for "sales
price" and "gross receipts" do not include the
value of a vehicle traded-in for a new vehicle, 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. 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, under this bill the
sales tax would be based on $16,000-the original sales
price minus the trade in value.
Becomes operative on the first day of the first
calendar quarter commencing more 90 days after the bill is
enacted.
FISCAL EFFECT:
BOE estimates that state and local revenue losses
associated with this bill will be approximately $330
million annually.
COMMENTS:
A. Purpose of the Bill
According to the author; the auto industry (including
both manufacturers and dealers) has been hard hit by the
recent economic slump. This bill would provide an incentive
for consumers to purchase new vehicles and trade in their
existing vehicle by providing an additional tax break.
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This deduction would only apply to "trade-in property
of like kind" and would not allow trades like boats for
cars, farm machinery for trucks, or jewelry for motor
vehicles.
B. You're the next contestant to win a used car!
According to the California New Car Dealers
Association (CNCDA) new car sales are down: sales dropped
8 percent in 2008 compared to 2007 (is this transposed?)
and for the first quarter of 2009, sales were down almost
19 percent compared to the first quarter of 2008.
Proponents of SB 714 believe that exempting the value of a
trade-in vehicle from the gross receipts of a new car
purchase provides an inventive for people to purchase new
cars. As a secondary benefit, modernizing California's
cars improves air quality as new cars emit less smog than
their older counterparts.
However, according to the CNCDA the reason for
declining new car sales is because of consumer debt levels
running at record highs, households tapping into their
savings to boost spending, the slump in the housing market,
rising fuel prices, and new vehicle sales rising above
historical levels. CNCDA says, "The eventual toll that
these excesses would take on new vehicle sales was
predictable." Changing California's tax policy towards new
vehicle purchases does not address any of the reasons
identified by the CNCDA as to why people are not buying new
cars, trucks, or sports utility vehicles. Furthermore,
classic economic theory suggests that the markets correct
themselves and interfering ultimately delays return to
market equilibrium. Lastly, the efficacy of this tax
expenditure is unknown. Perhaps those who have the
financial ability to purchase a new car during these
difficult economic times would do so regardless of the
provisions of SB 714. Similarly, those who do not have the
financial ability to purchase a new car most likely would
not be able to even if SB 714 was enacted.
C. What about me?
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SB 714 sets a precedent to extend a sales and use tax
exemption for trade-ins for other durable goods. Other
durable goods often traded in include: home appliances,
kitchen appliances, furniture, copy machines, and jewelry.
If a car's trade-in value should be excluded from the
definition of sales price and gross receipts, the Committee
may wish to consider the precedent set by the measure.
D. Technical Concerns
The BOE has identified several technical concerns with
SB 714. Namely, the author may wish to consider defining
"vehicle" and clarify what qualifies as a "new vehicle."
Additionally, SB 714 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. The author may wish to
consider setting the value exemption at the Kelley Blue
Book value of the vehicle.
E. Similar Bills
This bill is almost identical to SB 658 (Walters) set
for hearing in this committee on May 13, 2009. The only
difference is that SB 658 includes motorcycles.
Support and Opposition
Support: New Car Dealers Association
California Motorcycle Dealers
Association
Oppose: California School Employees Association,
AFL-CIO
California Professional Firefighters
Association
California Tax Reform Association
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Consultant: Gayle Miller