BILL ANALYSIS Ó
AB 1280
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Date of Hearing: April 20, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1280
(Maienschein) - As Introduced February 27, 2015
SUBJECT: Sales and use taxes: exemption: tax holiday: small
businesses
SUMMARY: Establishes a partial sales and use tax (SUT)
exemption for tangible personal property (TPP) sold by, or
purchased from, a retailer that is a "small business", for the
one-day period beginning at 12:01 a.m. on the Saturday following
Thanksgiving and ending at midnight on the same day.
Specifically, this bill:
1)Defines a "small business" as a retailer that remitted to the
State Board of Equalization (BOE) less than $200,000 in tax
for the previous four calendar quarters.
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2)Provides that a "small business" also means a retailer that
has been in operation for less than four calendar quarters and
remitted less than an average of $50,000 in tax for each
calendar quarter of operation.
3)Provides that, notwithstanding any provision of the
Bradley-Burns Uniform Local SUT Law or the Transactions and
Use Tax Law, this bill's exemption shall not apply with
respect to any tax levied by a county, city, or district
pursuant to either law.
4)Takes immediate effect as a tax levy, but becomes operative on
January 1, 2016.
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 California.
2)Complimentary 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
California's use tax, the purchaser remains liable for the
tax, unless the use is exempt. The use tax is set at the same
rate as California's sales tax and must generally be remitted
to the BOE.
FISCAL EFFECT: The BOE estimates that this bill would reduce
SUT revenues by roughly $24 million annually.
COMMENTS:
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1)The author has provided the following statement in support of
this bill:
AB 1280 allows a one-day sales and use tax exemption
annually for small businesses that remit less than $200,000
over four quarters to the State Board of Equalization. AB
1280 will go a long way toward stimulating local economies,
and the state economy as a whole, while sending a message
to small businesses that they are not overlooked as the
leading job creators.
2)This bill is sponsored by Small Business California, which
notes:
California is a heavily taxed and regulated state, making
it extremely difficult for small business owners to meet
their obligations under the current law. Most do not have
in-house accountants and legal representatives.
Consequently, it costs small businesses almost three times
more to comply with our state's tax laws than larger
businesses.
3)Proponents of this bill note the following:
California is often a difficult place in which to do
business. High taxes and heavy regulations make it
extremely difficult for small business owners to meet their
obligations under the law. Many of them are struggling to
generate the revenue needed to keep their doors open and
retain staff, and it seems that more requirements are
placed on them every year.
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AB 1280 sends a strong message to these vital contributors
to our state's economy that they are important. California
needs small businesses to thrive and create desperately
needed jobs, as well as generate critical tax revenue year
round. This measure will help to draw attention to small
businesses as viable places to shop, and will be a huge
incentive for consumers to turn out and support their local
"mom and pop" stores.
4)Opponents of this bill note the following:
Despite their political popularity, sales tax holidays are
based on poor tax policy and distract policymakers and
taxpayers from real, permanent, and economically beneficial
tax reform. Sales tax holidays introduce unjustifiable
government distortions into the economy without providing
any significant boost to the economy. They represent a
real cost for businesses without providing substantial
benefits. They are also an inefficient means of helping
low-income consumers and an ineffective means of providing
savings to consumers.
5)The BOE notes the following in its staff analysis of this
bill:
a) Definition of "small business" : "The definition of
'small business' may benefit certain larger businesses that
remit less sales tax in proportion to their total sales as
a result of their nontaxable sales, such as sales for
resale (wholesale sales) or sales made in interstate
commerce. These larger businesses may qualify as a 'small
business,' and thus benefit from the sales tax holiday. To
accomplish the author's intent, further limits on the
definition of 'small business' may be needed.
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"In addition, the bill defines 'small business' as one that
remitted to the BOE less than $200,000 in tax for the
previous four calendar quarters. Retailers that remitted
no taxes due to delinquency would qualify as small
businesses. Similarly, a retailer that reports $1 million
in taxes due, but only remits $199,999 in the previous four
calendar quarters, may qualify. BOE staff is available to
work with the author's office to resolve this concern.
"This bill should also clarify whether a retailer with
multiple locations qualifies under the aggregate for all
business locations."
b) Exemption will not apply to next day merchandise
exchanges and rain checks : "Under current law, merchandise
exchanges are considered two separate transactions: a
rescission of the original sale and a sale of the
replacement merchandise. For example, if a customer
purchases a medium-sized shirt and exchanges it for a
small-sized shirt, the transaction is regarded as a
separate sale of the small-sized shirt and a rescission of
the original sale of the medium-sized shirt. The retailer
is allowed to deduct from taxable sales an amount for the
sales price of the medium-sized shirt, and is also required
to include in the taxable sales amount, the sales price of
the small-sized shirt. 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
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apply to the small-sized shirt, since that transaction
occurred after the exempt holiday period. This may result
in reporting errors by retailers and added customer
inquiries and confusion.
"Rain checks similarly cause confusion. A retailer's rain
check does not constitute a sale. Therefore, a rain check
redeemed for taxable property outside the proposed holiday
period would not be eligible for the exemption."
c) Partial exemptions complicate administration :
"Currently, most sales and use tax exemptions are applied
to the total applicable sales and use tax. However, a few
partial exemptions exist in which only the state tax
portion of the sales and use tax rate is exempted, such as
the farm equipment and teleproduction equipment exemptions.
These partial exemptions are difficult for both retailers
and the BOE, and complicate return preparation and
processing. Moreover, errors attributable to these partial
exemptions occur frequently. This results in additional
return processing workload for the BOE."
d) Other states : "Fifteen states will hold a sales tax
holiday in 2015: Alabama, Arkansas, Connecticut, Georgia,
Iowa, Louisiana, Maryland, Mississippi, Missouri, New
Mexico, Oklahoma, South Carolina, Tennessee, Texas, and
Virginia. Eligible items include clothing, computers,
school supplies, energy star products, firearms and hunting
supplies, hurricane preparedness items, and severe weather
preparedness kits. For most states, the exemption applies
to specified items. Most states also place dollar limits
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on the amount exempt from sales tax.
"Only Louisiana exempts most individual tangible personal
property purchases. The exemption applies to the first
$2,500 spent on individual items of tangible personal
property for non-business use. Vehicles and meals are
excluded from the exemption."
6)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 new tax expenditure, in the form of
an annual SUT holiday for "small businesses" on the
Saturday immediately following Thanksgiving.
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
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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
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 ? California currently exempts
certain sales, either partially or completely, from the
SUT. Each additional exemption further erodes the tax base
and reduces governmental revenues. 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 SUT 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, the
proposed exemption may incentivize consumers to buy things
they would have bought anyway but on a different day.
d) This bill provides a very broad exemption : This bill's
proposed exemption is very broad in scope as it applies to
every conceivable item of TPP, from vehicles to luxury
watches, (assuming the items are purchased from a
qualifying "small business"). In addition, this exemption
is not targeted to low- and moderate-income consumers, but
is available to all consumers regardless of income. This
Committee may wish to consider excluding purchases of
certain expensive items from this SUT exemption.
e) No price cap : This bill does not limit the amount of
the purchase price that would be exempt from the SUT.
Without such a price cap, consumers would likely delay
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purchasing expensive items, such as appliances or jewelry,
until the annual 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 impact
low-income consumers as greatly as their higher income
peers and would introduce a measure of progressivity into
the state SUT. Most of the states that offer sales tax
holidays place dollar limits on the amount exempt from the
sales tax.
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 higher sales tax rates than their neighbor
states have enacted sales tax holidays to combat
cross-border retail competition. Unlike such states,
California lacks significant cross-border retail
competition for its physical businesses. 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 100 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' geographical decisions about where to shop or
draw consumers from out-of-state.
g) A burden on retailers : This bill creates a one-day SUT
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holiday. The administrative burden on retailers is quite
high with short-term exemptions as retailers must change
the tax rate twice in a single week.
h) Related legislation :
i) AB 718 (Melendez), of the 2013-14 Legislative
Session, would have provided an annual sales tax
exemption for TPP sold on April 15. AB 718 was held on
this Committee's Suspense File.
ii) AB 1007 (Cook), of the 2011-12 Legislative Session,
would have provided a sales tax holiday for specified
back-to-school products. AB 1007 was held on the
Assembly Committee on Appropriations' Suspense File.
iii) 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 on this
Committee's Suspense File.
iv) 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 by this
Committee.
v) 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 by
the Senate Committee on Revenue and Taxation.
vi) AB 1320 (Ashburn), of the 1999-2000 Legislative
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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
Small Business California (Sponsor)
California Asian Pacific Chamber of Commerce (Co-Sponsor)
National Federation of Small Business (Co-Sponsor)
Opposition
American Federation of State, County and Municipal Employees,
AFL-CIO
California Tax Reform Association
Service Employees International Union
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Analysis Prepared by:David Ruff / REV. & TAX. / (916) 319-2098