BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1125 HEARING: 4/11/12
AUTHOR: Hancock FISCAL: Yes
VERSION: 3/21/12 TAX LEVY: No
CONSULTANT: Lui
LOCAL GOVERNMENT CONTRACTS:
SELLER'S PERMITS AND CERTIFICATES OF REGISTRATION
Requires local government entities to contract from a
vendor or contractor that has a valid California's seller's
permit or certificate of registration.
Background and Existing Law
The California Sales and Use Tax Law imposes a use tax on
the storage, use, or other consumption of tangible personal
property in California. Use tax, just like sales tax,
funds state and local services throughout California. If a
consumer makes a purchase, typically via the Internet,
phone, or mail-order, a vendor might not collect use tax,
leaving the consumer to believe that the purchase is "tax
free." If a seller is not registered with the Board of
Equalization (BOE) with a valid seller's permit or
certificate of registration to collect use tax, California
cannot compel out-of-state sellers to collect tax on sales
to state residents. Instead, the consumer must remit an
equivalent use tax to the BOE.
If a state department or agency wants to purchase tangible
personal property, it must contract with a vendor or
contractor, or any affiliate of a vendor or contractor,
that holds a valid seller's permit or certificate of
registration-use tax (SB 1009, Alpert, 2003). The
Franchise Tax Board defines tangible personal property as
property that is not land or land improvements, buildings,
inherently permanent structures, or structural components.
SB 1009 requires a state agency to verify that a vendor has
a valid seller's permit or is registered to collect the
California use tax. If a vendor lacks a permit or
certificate of registration, the state agency cannot
purchase tangible personal property from the vendor, unless
the purchase meets a compelling state need.
SB 1125 -- 3/21/12 -- Page 2
In fiscal year 2010-11, BOE found that consumers' failure
to pay use tax on purchases from out-of-state vendors was
the most common form of taxpayer noncompliance. These
untaxed purchases from out-of-state vendors constituted
approximately 20% of net sales and use tax audit
deficiencies, resulting in more than $84.6 million in
unpaid taxes in FY 2009-10.
In 2011, the BOE's Sales and Use Tax Department identified
three components of the "tax gap," the difference between
taxes owed and taxes paid:
Use tax liabilities from unregistered business and
individual consumers;
Non-filers or tax evasions; and,
Under-reporting or non-payment of registered
taxpayers.
According to the BOE, the annual use tax gap associated
with remote sales from out-of-state sellers is
approximately $1.2 billion. The BOE estimates that
consumers owe $851 million and businesses owe $346 million
each year. Use tax non-compliance also creates a
competitive disadvantage for California businesses that
compete with out-of-state online, mail, or other retailers
that don't collect use tax. BOE members want to close the
tax gap and reduce competitive disadvantages by requiring
local governments to contract with businesses that are
registered to collect the use tax.
Proposed Law
Senate Bill 1125 prohibits a local government entity from
contracting with a vendor, contractor, or an affiliate of a
vendor or contractor for the purchase of tangible personal
property, unless the vendor, contractor, and all of its
affiliates that makes sales for delivery into California
hold a California's seller's permit or a certificate of
registration.
On and after June 1, 2013, each vendor, contractor, of
affiliate of a vendor or contract offered to do business
with a local government entity shall submit a copy to the
local government, of that retailer's seller's permit or
certificate of registration, and a copy of each of the
SB 1125 -- 3/21/12 -- Page 3
retailer's applicable affiliate's seller's permit or
certificate of registration.
SB 1125's requirement that a local government entity must
obtain a copy of a retailer's seller's permit or
certificate of registration, and a copy of each of the
retailer's applicable affiliate's seller's permit or
certificate of registration, does not apply to a credit
card purchase of goods of $2,500 or less, not to exceed
$7,500 per year for each company from which a local
government entity is purchasing goods by credit card. Each
local government entity must monitor the use of this
exemption.
SB 1125 also exempts a local government entity from its
contracting requirements if the local government entity's
government body, or a person delegated authority by the
local government entity's governing body, makes a written
finding that the contact is necessary to meet a compelling
local government interest.
SB 1125 defines the following terms:
"Affiliate of the vendor or contractor" means any
person or entity that is controlled by, or is under
common control of, a vendor or contractor through
stock ownership or any other affiliation.
"Compelling local interest" includes, but isn't
limited to, the following:
o Ensuring the provision of essential
services;
o Ensuring the public health safety, and
welfare; and
o Responding to an emergency, defined as a
sudden, unexpected occurrence that poses a clear
and imminent danger, requiring immediate action
to prevent or mitigate the loss or impairment or
life, health, property, or essential public
service.
"Local government entity" means a city, county,
city and county, community college district, school
district, or county superintendent of schools located
in California.
SB 1125 -- 3/21/12 -- Page 4
The California Constitution entitles local governments to
reimbursement if the Legislature mandates a higher level of
or new service. SB 1125 declares that if the Commission on
State Mandates determines that SB 1125 contains costs
mandated by the state, local agencies and school districts
are entitled to reimbursement for those costs.
State Revenue Impact
No estimate.
Comments
1. Purpose of bill . According to a 2011 U.S. Census
Bureau survey, internet retail sales amount annually over
$100 billion, making it a large share of overall retail
commerce. Budget-savvy customers often make purchases
online but may be unaware that they need to remit the use
tax. Collecting use tax relies heavily on purchasers'
compliance. Taxpayers remitted only $10.2 million of the
$795 million in use tax due was filed on income tax returns
in 2010. Given the low dollar amount of each transaction,
focusing on individual compliance is not productive. Since
2003, state agencies must contract with sellers that have a
valid seller's permit or certificate of registration (SB
1009, Alpert, 2003). Requiring local governments'
purchases to meet the same requirement will encourage more
out-of-state vendors to voluntarily register to collect the
use tax. Registering more out-of-state vendors with BOE
will increase revenues increase from consumers who would
not otherwise have reported and paid the use tax.
2. Evidence . For the last nine years, state agencies have
been required to contract with registered vendors, yet a
$1.2 billion tax gap remains. It is unclear whether more
out-of-state vendors registered with the BOE after SB 1009
became law in 2004. Further, it is unclear how much of the
tax gap can be attributed to local governments' purchasing
powers. Without any discernible evidence that SB 1009
reduced the use tax gap or increased out-of-state vendor
registrations with the BOE, how can Legislators expect SB
1125 to be effective? The Committee may wish to consider
whether SB 1009's results justify imposing restrictions on
local governments' contracts.
SB 1125 -- 3/21/12 -- Page 5
3. A loophole . SB 1125 mirrors SB 1009's language,
including a broad exemption to the contracting
requirements. If a local government entity, or anyone
delegated by the government entity makes a written finding
that a contract with an out-of-state vendor meets a
"compelling local government interest," then the contract
requirement is waived. A compelling local interest can be
anything from ensuring the provision of essential services,
ensuring public health, safety, and welfare, or responding
to an emergency. If this exemption allows local
governments to get around SB 1125 contracting requirement,
the bill won't reduce the tax gap or get more vendors that
sell to both private entities and local governments to
register and collect the use tax. The Committee may wish
to consider amending SB 1125 to more narrowly define a
compelling local government interest.
4. Cut-out . Special districts are not subject to SB
1125's requirements. Because special districts don't
receive sales and use tax revenues, special district
officials contend that they wouldn't be able to offset the
costs of implementing SB 1125. Excluding special districts
undermines SB 1125's potential to leverage local
governments' buying power. The Committee may wish to
consider amending SB 1125 to make the bill's contracting
requirements apply to special districts.
Support and Opposition (4/5/12)
Support : Board of Equalization.
Opposition : Unknown.