BILL ANALYSIS �
AB 718
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Date of Hearing: April 15, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 718 (Melendez) - As Introduced: February 21, 2013
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Exemption: Sales Tax Holiday: April 15th.
SUMMARY : Provides a sales tax exemption for tangible personal
property (TPP) sold on April 15 in 2014 and each calendar year
thereafter. Specifically, this bill :
1)Provides that each calendar year, beginning in 2014, the sales
tax holiday shall run from 12:01 a.m. on April 15 until
midnight on that same day.
2)Specifies that, notwithstanding existing law, the sales tax
exemption will not apply with respect to any local sales and
use taxes and transactions and use taxes.
3)Takes immediate effect as a tax levy.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling TPP,
absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)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).
FISCAL EFFECT : The BOE staff estimates that this bill would
result in a revenue loss to the General Fund of $106 million in
2014, $114 million in 2015, and $121 million in 2016.
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COMMENTS :
1)The Author's Statement . The author has provided the following
statement of support of this bill:
When I was mayor of Lake Elsinore[,] I implemented a
business tax holiday[,] saving local businesses over
$100,000 in two years. These savings allowed businesses to
keep their doors open and[,] more importantly[,] saved
jobs. My intent for AB 718 is just that: to promote
businesses and create jobs. California's economy is
consumer based. By providing our citizens with more
disposable income[,] it grants the opportunity for them to
reinvest it back into the economy. This is essential to
help California recover from the Great Recession. Rather
than focusing economic stimulus efforts from the top down,
with large government spending programs, AB 718 will
concentrate the stimulus efforts from the bottom up
directly with the consumer.
2)Arguments in Support . Proponents state that:
"The sales tax disproportionately impacts low-income families
because it represents a higher percentage of their incomes.
Conversely, a tax holiday provides greater benefit to
low-income persons. Many families could use the savings from
the tax holiday to have additional funds available for other
critical expenses. The holiday also helps larger families,
since there is no cap on the total number or amount of
purchases. For example, saving 7-9% on four or five jackets,
plus shoes, socks, pants, and shirts, amounts to savings that
can be substantial."
The proponents also argue that April 15th, more than any other
day, "should be treated as a tax holiday" and could be used to
focus attention on the fact that California "has the highest
state sales tax and income tax in the nation, or the highest
corporate tax in the Western United States." They conclude
that AB 718 "will provide relief on what has otherwise become
a very burdensome day for taxpayers."
3)Arguments in Opposition . Opponents state that:
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"Sales tax holidays have no apparent economic benefit, other
than encouraging people to buy at a certain time rather than
others, which results in revenue loss but no net increase in
economic activity. We have trouble understanding why the
income tax filing date should be a sales tax holiday, since
taxpayers do not necessarily receive refunds on that date, nor
would encouraging consumption of tax refunds (as opposed to
saving them or paying down debt) be a necessarily beneficial
social purpose. If taxpayers are paying and not receiving
refunds, we also fail to see the purpose of encouraging
consumption on that date."
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 1960s, 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 on April 15 of each calendar year
beginning with 2014.
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
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 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
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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) Incentive or reward ? The state currently exempts
certain sales, either partially or completely, from the
sales and use tax. 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 a state sales tax holiday may induce
consumers to spend more on a particular day, it is unclear
whether this exemption would increase the overall number of
sales during the calendar year. Put differently, it may
incentivize consumers to buy things they would have bought
anyway but on a different day.
d) This bill provides a very broad exemption . According to
the author, this bill is designed to provide tax relief to
consumers in order to stimulate the economy in California.
The proposed exemption is very broad in scope as it applies
to every item of TPP, including vehicles, airplanes, and
motorboats. In addition, this exemption is not targeted to
low- and moderate-income consumers, but is available to all
taxpayers regardless of income. This Committee may wish to
consider excluding purchases of certain expensive items
from this sales tax exemption.
e) No price cap. This bill does not limit the amount of
the purchase price that would be exempt from the sales tax.
Without such a price cap, consumers will delay purchasing
expensive items, such as cars, appliances or boats, for
example, until the tax holiday. The perceived tax savings
for such large purchases would be so great that many
taxpayers would simply forego making such purchases any
other day of the year. A price cap would not burden
low-income consumers as greatly as their higher-income
peers and would introduce a measure of progressivity into
the state sales tax. Most of the states that hold sales
tax holidays place dollar limits on the amount exempt from
the sales tax.
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This Committee has considered similar bills in the past that
included price caps ranging from $100 to $500. The
Committee may wish to consider imposing a cap on the
purchase amount that would be eligible for the sales tax
exemption.
f) California has little cross-border retail competition .
Many states with high sales tax rates compared to their
neighbor states have enacted sales tax holidays to combat
cross-border retail competition. Unlike such states,
California lacks significant cross-border retail
competition. California's large population centers are far
from neighbors with lower sales tax rates. For example,
New York has sales tax holidays. The New York City
metropolitan area is adjacent to both New Jersey and
Connecticut and the Albany metropolitan area is adjacent to
Massachusetts. In contrast, Los Angeles and San Francisco
are over a hundred miles away from California's neighbors.
New York faces a near-constant battle to encourage its
residents to shop in-state. California does not. For this
reason, the sales tax holiday provided by this bill is
unlikely to impact Californians' decisions about where to
shop or draw consumers from out-of-state.
g) Why Tax Day ? According to the author, April 15 was
chosen to be designated as a sales tax holiday because
April is a slow time of the year for retailers. As
discussed above, this bill may improve sales in April, but
it would do so at the cost of sales every other month of
the year. Even assuming April is a slow time for
retailers, retailers have traditionally been able to budget
for a slow April. Furthermore, April 15th is usually a
deadline for filing federal and state income tax returns,
also known as Tax Day. When April 15th falls on a Saturday
or Sunday, Tax Day is the following Monday. Tax Day is
always a week day. It is unclear to the Committee staff
why the tax holiday be the same day as Tax Day. The author
may wish to amend this bill to ensure that the tax holiday
always fall on a Saturday or Sunday, so that consumers
could more easily shop on the weekend.
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h) A burden on retailers . This bill creates a one-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.
i) Exemption may not apply to some merchandise exchanges
and rain checks . The BOE staff, in its analysis of this
bill, notes that under current law, merchandise exchanges
are considered to be two separate transactions: a
rescission of the original sale and a separate sale of the
replacement merchandise. The proposed sales tax exemption,
thus, would not apply to an item that is exchanged after
the tax holiday. This may result in reporting errors by
retailers and added confusion and inquiries by customers.
Another source of confusion could come from the use of rain
checks. Current law provides that a rain check issued by a
retailer does not constitute a sale of TPP. 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.
j) Potential legal issue . Committee staff notes that the
proposed 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.
Mail order purchases made on April 15, online purchases
made on April 15, and purchases made in other states on
April 15 and brought into California would be subject to
the use tax. In contrast, purchases of TPP in California
would not be subject to the sales tax. This exemption
would give in-state purchases an advantage over inter-state
transactions, which may burden inter-state commerce. By
placing in-state retailers and out-of-state sellers on
unequal footing, this bill may be subject to challenge
under the Commerce Clause of the United State Constitution.
This Committee may wish to consider amending this bill to
expand the application of the sales tax exemption to
include the use tax as well.
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aa) Related legislation :
i) AB 1007 (Cook), introduced in the 2011-12
Legislative Session, would have provided a sales tax
holiday for specified back-to-school products. AB 1007
was held under submission in the Assembly Committee on
Appropriations.
ii) AB 548 (Garcia), introduced in 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.
iii) AB 1185 (Mountjoy), introduced in 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.
iv) AB 944 (Cardenas), introduced in 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.
v) AB 1320 (Ashburn), introduced in 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 :
Support
California Retailers Association
Howard Jarvis Taxpayers Association
Opposition
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California Tax Reform Association
Analysis Prepared by : Edward Beeby & Oksana Jaffe / REV. & TAX.
/ (916) 319-2098