BILL ANALYSIS �
AB 1007
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Date of Hearing: April 11, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1007 (Cook) - As Introduced: February 18, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales tax: exemption: back-to-school products
SUMMARY : Provides an annual four-day sales tax holiday for
"qualified back-to-school products" sold to a "qualified
purchaser." Specifically, this bill :
1)Provides that each year, beginning in 2012, the sales tax
holiday shall run from 12:01 a.m. on the first Friday in
August until midnight on the first Monday in August.
2)Defines "qualified back-to-school products" to include:
a) Individual articles of clothing with a retail price no
greater than $100;
b) Footwear with a retail price no greater than $100;
c) School supplies, including, but not limited to, pens,
paper, pencils, binders, notebooks, school textbooks, book
bags, backpacks, lunchboxes, and calculators with a retail
price no greater than $100; and,
d) Sports equipment with a retail price no greater than
$100.
3)Defines a "qualified purchaser" as an individual who purchases
qualified back-to-school products at the retailer's physical
place of business during the sales tax holiday.
4)Provides that, notwithstanding existing law, the state shall
not reimburse local agencies for sales tax revenues lost as a
result of the exemption.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
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1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
State Board of Equalization (BOE).
3)Provides a sales and use tax (SUT) exemption for new
children's clothing sold to a nonprofit organization for
distribution, free of charge, to individuals under 18 years of
age.
FISCAL EFFECT : The BOE's revenue estimate for this bill is
pending.
COMMENTS :
1)The author states, "As schools slash their budgets, parents
have no choice but to pick up the slack. This sales tax
holiday will help preserve California's high educational
standards by helping parents buy the supplies their children
need for academic success."
2)Opponents state, "In your bill, the definitions of a qualified
back-to-school product and a qualified purchaser are too
broad, and will open the door for abuse by those who purchase
these products for other purposes other than attending school
and therefore should not qualify for the tax exemption."
3)BOE notes the following in its staff analysis of this bill:
a) "This proposed law is modeled after a similar law in New
York State. Sales of clothing and footwear are exempt from
tax in New Jersey, and many residents of New York went to
New Jersey to purchase their clothes. To help discourage
this, New York State implemented a law in 1997 allowing for
a one-week exemption from the tax for the sales of clothing
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valued under $100. The State of New York continues to
offer the sales tax exemption on clothing items, but due to
budget concerns in that state, the exemption for clothing
items costing less than $110 was suspended from October
2010 to April 2011. Starting in April 1, 2011 the
exemption will be reinstated but only for items costing
below $55. Then, beginning after March 31, 2012, the
exemption for items priced less than $110 will be
reinstated in full."
b) Definition of clothing and footwear . "The proposed law
does not define what is meant by clothing and footwear.
Would the proposed exemption apply to the sale of any
article of clothing and footwear designed to be worn on or
about the human body? Would the proposed exemption apply
to the sale of accessories, including jewelry, handbags,
luggage, umbrellas, wallets, watches, and similar items
carried on or about the human body? Since the purpose of
the bill is to assist parents buy school supplies for their
children, perhaps the proposed exemption should apply to
the sale of book bags and backpacks within which students
would normally carry textbooks and school supplies?"
c) Definition of sports equipment . "Without a definition
of sports equipment the exemption would seem to apply to
all types of sports equipment that most students would
probably not be involved in and most schools probably don't
offer as an extracurricular activity, for example, lawn
bowling, paintball accessories, boxing, fly fishing, table
tennis, snorkeling, hunting, hiking, kayaking, cricket,
snowboarding, and surfing, just to name a few. The author
may wish to specify certain sports associated with the
sales tax exemption in order to provide a more focused
benefit to student athletes."
d) Exemption may not apply to some merchandise exchanges
and rain checks . "Under current law, when merchandise is
returned for other merchandise, the law considers the
transaction as two separate transactions: a recission of
the original sale and a separate sale of the replacement
merchandise. As an example, if a customer purchases a
medium-sized shirt and exchanges the shirt for a
small-sized shirt, the transaction is regarded under the
law as a separate sale of the small-sized shirt and a
recission of the original sale of the medium-sized shirt.
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The retailer is allowed to deduct from his or her taxable
sales amount for purposes of reporting the correct amount
of sales tax to the Board, the sales price of the
medium-sized shirt, and is also required to include in his
or her taxable sales amount, the sales price of the
small-sized shirt. Using this example under the proposed
holiday period, if the medium-sized shirt is purchased
during the sales tax holiday period, and is exchanged for
the small-sized shirt after the holiday period, the
proposed exemption would not apply to the exchange of the
small-sized shirt since that transaction is recognized
under the law as having occurred after the exempt holiday
period. This may result in reporting errors by retailers
and added confusion and inquiries by customers.
"Another source of confusion could result from the use of
rain checks. Current law also provides that a rain check
issued by a retailer does not constitute a sale of tangible
personal property. Therefore, if a retailer is out of
stock of a particular item and issues a rain check to the
customer during the holiday period, and the customer
subsequently uses the rain check to purchase the out of
stock item after the proposed holiday period, the exemption
would not apply."
4)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960's, United
States Treasury officials began arguing that these features
of the tax law should be referred to as "expenditures,"
since they are generally enacted to accomplish some
governmental purpose and there is a determinable cost
associated with each (in the form of foregone revenues).
This bill would enact a tax expenditure, in the form of a
sales tax holiday, designed to assist those purchasing
"qualified back-to-school products."
b) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
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place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
it should also be noted that, once enacted, it generally
takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote. To that end, the author may wish to consider adding
an appropriate sunset date to this bill to allow the
Legislature to review this tax expenditure in the future.
c) This bill provides a very broad exemption . According to
the author, this bill is designed to provide tax relief to
parents buying school supplies for their children. The
proposed exemption, however, is far broader in scope.
Specifically, nothing in this bill requires items to be
purchased for use by students. In addition, this exemption
is not targeted to low- and moderate-income consumers, but
is available to all taxpayers regardless of income. For
example, this bill includes within the definition of
"qualified back-to-school products" individual articles of
clothing worth $100 or less. Thus, if an individual with
no children were to purchase a cashmere scarf for $95
during the sales tax holiday, that purchase would be exempt
under this bill. Any effort, however, to limit the sales
tax exemption based on the end use of the property would be
difficult if not impossible to administer. To assist
struggling parents with school-age children, the author may
wish to instead create a grant program to provide clothing
vouchers to families with incomes below a certain level.
d) Incentive or reward ?: The state currently exempts
certain sales, either partially or completely, from the
SUT. Each additional exemption further erodes the tax base
and reduces revenues for both the state and local
governments. Because individual exemptions establish a
precedent for future legislation, it is important to
examine whether a particular tax expenditure actually
changes behavior or simply subsidizes existing behavior.
While the purchase of school supplies is spread throughout
the year, more of these purchases are made just prior to
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the start of the school year. Thus, it is not clear
whether this exemption would increase the already high
number of sales taking place during this time of year.
e) A burden on retailers . This bill creates a four-day
sales tax holiday. The administrative burden on retailers
is quite high with short-term exemptions, as retailers must
change the tax rate for the covered items twice in a single
week.
f) Potential legal issue . Committee staff notes that this
exemption applies only to sales in person and that
consumers ordering items from out-of-state would continue
to be liable for the use tax during the holiday period.
This provision may be subject to challenge under the
commerce clause of the United State Constitution.
g) Technical amendment : On page 2, line 4, replace
"three-day" with "four-day".
h) Related legislation :
i) AB 548 (Garcia), of the 2005-06 Legislative Session,
would have provided a sales tax holiday for specified
back-to-school products. AB 548 was held in this
Committee.
ii) AB 1185 (Mountjoy), of the 2001-02 Legislative
Session, would have provided a partial sales tax
exemption for clothing or footwear sold during a
specified annual period. AB 1185 was held in this
Committee.
iii) AB 944 (Cardenas), of the 1999-2000 Legislative
Session, would have established a three-day sales tax
holiday for specified articles of clothing and footwear
purchased for $100 or less. AB 944 was never heard in
the Senate Committee on Revenue and Taxation.
iv) AB 1320 (Ashburn), of the 1999-2000 Legislative
Session, would have provided a one-week sales tax holiday
for any item of TPP purchased for less than $500. AB
1320 failed passage in this Committee.
REGISTERED SUPPORT / OPPOSITION :
AB 1007
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Support
None on file
Opposition
California State Association of Counties
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098