BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1125 (Hancock) - Local government contracts: seller's permits
and certificates of registration.
Amended: April 17, 2012 Policy Vote: G&F 6-3
Urgency: No Mandate: Yes
Hearing Date: May 24, 2012 Consultant: Mark McKenzie
SUSPENSE FILE.
Bill Summary: SB 1125 would require local government entities to
purchase tangible goods from vendors or contractors that possess
a valid seller's permit or certificate of registration issued by
the Board of Equalization (BOE), except as specified.
Fiscal Impact:
Unknown reimbursable mandate costs for nearly 1,700 affected
local agencies to monitor compliance with the restrictions and
the use of exceptions (General Fund). Some of the costs
imposed on local agencies would be offset by local savings to
the extent the bill provides relief from tracking and
self-reporting use tax obligations on purchases made from
out-of-state sellers that are not registered with BOE.
Unknown use tax revenue gains to the extent that the bill
compels out-of-state vendors to register with the BOE to
collect and remit use taxes. Revenue gains are not expected
to be related to the collection of additional use tax from
local governments, but from sales to other California
consumers who make purchases from those out-of-state vendors
that register with BOE. (General Fund, local funds).
Background: Existing state law generally imposes a use tax on
the storage, use, or other consumption in this state of tangible
property purchased from any retailer. The use tax is imposed at
the same rate as the sales tax on the purchaser of goods, but if
a retailer is engaged in business in the state, it must register
with the BOE to collect and remit the use tax on all taxable
sales to California consumers. If a use tax is not imposed at
the time of a sale, the purchaser is required to voluntarily pay
the use tax, but compliance has historically been low. The BOE
indicates that the use tax gap associated with remote sales by
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out-of-state retailers, typically via mail order, by phone, or
the Internet, is approximately $1.2 billion annually.
Existing law, SB 1009 (Alpert) Chapter 718/2003, requires state
agencies to contract for purchases of tangible goods with a
vendor or contractor that holds a valid seller's permit or
certificate of registration issued by the BOE, unless the
contract is necessary to meet a compelling state interest, as
specified. That bill was a use tax compliance measure intended
to compel out-of-state vendors to register with the BOE to
collect use tax on all sales to California consumers.
Proposed Law: SB 1125 would prohibit local government entities
from purchasing tangible goods from vendors, contractors, or the
affiliates of those vendors or contractors that do not possess a
valid seller's permit or certificate of registration issued by
the BOE. The bill provides an exemption from this restriction
for contracts that are necessary to meet a compelling local
government interest, as specified, as long as exempted purchases
do not exceed five percent of the total number of contract
purchases of tangible goods.
SB 1125 would also require each vendor, contractor, or affiliate
of a vendor or contractor that is offered a contract to do
business with a local government entity to provide that entity
with a copy of its seller's permit or certificate of
registration, as well as a copy of each of its affiliate's
permits and certificates. This requirement would not apply to
credit card purchases of $2,500 or less, up to $7,500 per year
from a single company. Each local government entity must
monitor the use of this exemption.
Staff Comments: This bill is likely to result in some magnitude
of use tax revenue gains. Presumably local governments
currently voluntarily pay use tax obligations associated with
purchases from unregistered out-of-state vendors, so any gains
would be attributable to sales to other California consumers by
retailers who register with the BOE as a result of this bill.
The bill's requirement that local governments contract with
vendors that possess a valid seller's permit or certificate of
registration, except as specified, would compel local agencies
to track contracting data to monitor compliance with the
restrictions and the use of exemptions, thereby imposing a
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reimbursable state-mandated local program. While actual
reimbursable costs are indeterminable, the bill would impact
nearly 500 cities, 58 counties, 1,000 school districts, 72
community college districts, and 58 county superintendents of
schools (nearly 1,700 entities overall). Even if 25% of the
entities took advantage of the exemptions and incurred $1,000 in
costs for tracking, total costs would be over $400,000 annually
in state-reimbursable costs. It's likely some larger agencies
would have substantial costs to keep track of their overall
contracting and procurement costs to ensure compliance. Some of
the mandated costs could be offset by local agency savings to
the extent these entities increasingly contract with registered
sellers and are relieved of the responsibility to track and
self-report use tax obligations for purchases from out-of-state
sellers that are not registered with the BOE.