Sales and Use Tax - California Legislative Analyst's Office · Sales and Use Tax—Overview Page...

„„„„ Sales and Use Tax

Page 127

„„„„ TABLE OF CONTENTS—SALES AND USE TAX

Sales and Use Tax—Overview . . . . . . . . . 129

PROGRAMS GENERALLY AVAILABLE FOR ALL

TRANSACTIONS INVOLVING SPECIFIC COMMODITIES

Transactions InvolvingEnergy-Related Products

Gas, Electricity, Water, Steam, and Heat . . 133

Organic Products GrownExpressly for Fuel Purposes . . . . . . . . . 135

Agricultural, Timber, Municipal, andIndustrial Waste By-Products . . . . . . . . 136

Use of Refiners' Gas . . . . . . . . . . . . . . . . . . 137

Transactions Involving Meals andFood-Related Products

Animal Life . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Animal Feed . . . . . . . . . . . . . . . . . . . . . . . . 139

Seeds and Plants . . . . . . . . . . . . . . . . . . . . 140

Qualified Fertilizer . . . . . . . . . . . . . . . . . . . . 141

Poultry Litter . . . . . . . . . . . . . . . . . . . . . . . . 142

Food Products . . . . . . . . . . . . . . . . . . . . . . . 143

Candy, Gum, and ConfectioneryProducts . . . . . . . . . . . . . . . . . . . . . . . . 145

Bottled Water . . . . . . . . . . . . . . . . . . . . . . . . 146

Packing Ice and Dry Ice . . . . . . . . . . . . . . . . 147

Carbon Dioxide Used in Packaging . . . . . . . 148

Transactions Involving Human MedicinesAnd Medical-Related Products

Prescription Medicines . . . . . . . . . . . . . . . . 149

Specified Medical-Related Products . . . . . . 150

Medical Identification Tags . . . . . . . . . . . . . 151

Specified Medical Health Information . . . . . 152

Health and Safety Insignia andEducational Materials . . . . . . . . . . . . . . 153

Food Animal Medicines . . . . . . . . . . . . . . . . 154

Medicated Feed and Drinking Water . . . . . . 155

Transactions Involving the Media

Printers' Aids . . . . . . . . . . . . . . . . . . . . . . . . 156

Partnership Property Used toProduce Motion Pictures . . . . . . . . . . . 157

Newspapers and Periodicals, DistributedFree of Charge or by Subscription . . . . 158

Leases of Motion Pictures . . . . . . . . . . . . . . 159

Master Tapes and Master Records . . . . . . . 160

Printed Advertising Materials . . . . . . . . . . . . 161

Motion Pictures and Production Services . . 163

Transactions Involving TransportationEquipment and Related Products

Mobile Transportation Equipment Leases . . 165

Vessels That Transport Over 1,000 Tons . . 166

Vehicles Modified for PhysicallyHandicapped Persons . . . . . . . . . . . . . 167

New or Remanufactured Trucks andTrailers For Out-of-State Use . . . . . . . . 168

Property Used in Space Flights . . . . . . . . . . 170

Aircraft Repair and Related Equipment . . . . 171

Railroad and Related Equipment . . . . . . . . 172

Transactions InvolvingHousing-Related Products

Leases of Specified Linens . . . . . . . . . . . . . 173

Leases of Household Furnishings . . . . . . . . 174

Factory-Built Housing . . . . . . . . . . . . . . . . . 175

New Mobilehomes . . . . . . . . . . . . . . . . . . . . 176

Used Mobilehomes . . . . . . . . . . . . . . . . . . . 177

Miscellaneous Transactions

Custom Computer Programs . . . . . . . . . . . . 178

California Gold Medallions . . . . . . . . . . . . . 179

Monetized Bullion, Gold and Silver Bullion,And Numismatic Coins . . . . . . . . . . . . . 180

Returnable Containers . . . . . . . . . . . . . . . . 182

Containers Whose Contents areTax-Exempt . . . . . . . . . . . . . . . . . . . . . 183

Original Artworks and DisplaysFor Specified Museums . . . . . . . . . . . . 184

Single-Use Mailing Lists . . . . . . . . . . . . . . . 185

Table of Contents—Sales and Use Tax

Page 128

PROGRAMS WHICH PRIMARILY DEPEND ON

WHO THE SELLER, PURCHASER, OR DESIGNATED

CONSUMER OF A COMMODITY IS

Transactions InvolvingEnergy-Related Products

Sale-Leasebacks InvolvingCertain Governmental Entities . . . . . . . 186

Motor Vehicle Fuel Used in Airplanes . . . . . 188

Fuel Sold to Air Common CarriersFor International Flights . . . . . . . . . . . . 189

Fuel Used in Water Common Carriers . . . . 190

Transactions Involving Meals andFood-Related Products

Meals and Food Products Served inSchools . . . . . . . . . . . . . . . . . . . . . . . . . 191

Hot Food Products ServedTo Airplane Passengers . . . . . . . . . . . . 192

Meals Served to Patients andResidents of Health Care Facilities . . . 193

Meals Provided to Qualified Low-IncomeSenior Citizens . . . . . . . . . . . . . . . . . . . 194

Meals Delivered to Elderly and DisabledIndividuals . . . . . . . . . . . . . . . . . . . . . . 195

Meals Prepared in Common Kitchen FacilitiesFor Qualified Senior Citizens . . . . . . . . 196

Meals and Food Products Served byReligious Organizations . . . . . . . . . . . . 197

Food Stamp Purchases . . . . . . . . . . . . . . . . 198

Transactions Involving Medicines andMedical-Related Products

Health Care ProfessionalsTreated as Consumers . . . . . . . . . . . . . 199

Veterinarians Treated as Consumers . . . . . 200

Transactions InvolvingTransportation-Related Products

Aircraft for Common Carriers or for Use byForeign Governments or Nonresidents 201

Trailers And SemitrailersMoved to Place of Sale . . . . . . . . . . . . 202

Qualified Watercraft and TheirComponent Parts . . . . . . . . . . . . . . . . . 203

Vehicles, Vessels, and Aircraft TransferredWithin a Family . . . . . . . . . . . . . . . . . . . 204

New Vehicles Sold to Foreign ResidentsFor Foreign Shipment . . . . . . . . . . . . . . 205

Other Miscellaneous Transactions

Occasional Sales . . . . . . . . . . . . . . . . . . . . . 206

Occasional Sales of Vehicles,Vessels, or Aircraft . . . . . . . . . . . . . . . . 207

Occasional Sales of Other Products byHay Producers . . . . . . . . . . . . . . . . . . . 208

Membership Fees Charged byConsumer Cooperatives . . . . . . . . . . . . 209

Clothing Alterations by ClothesCleaning and Dyeing Businesses . . . . . 210

Flags Sold By Veterans' Groups . . . . . . . . . 211

Vending Machine Sales of NonprofitOperators . . . . . . . . . . . . . . . . . . . . . . . 212

Photocopy Sales By Libraries . . . . . . . . . . . 213

Prisoner-of-War Bracelet Sellers . . . . . . . . . 214

Veterans Memorial Lapel Pins . . . . . . . . . . . 215

Qualified Sales of Youth Groups . . . . . . . . . 216

Yearbook and Catalog Sales by StudentOrganizations . . . . . . . . . . . . . . . . . . . . 218

Replacements for Destroyed MuseumExhibits . . . . . . . . . . . . . . . . . . . . . . . . . 219

Sales By PTAs, Co-Op Nursery Schools, andFriends of the Library . . . . . . . . . . . . . . 220

Rummage Sales by Qualified NonprofitOrganizations . . . . . . . . . . . . . . . . . . . . 221

Handcrafted Items Sold by QualifiedOrganizations . . . . . . . . . . . . . . . . . . . . 222

Charitable Organization Sales andDonations . . . . . . . . . . . . . . . . . . . . . . . 223

Property Loaned to EducationalPrograms . . . . . . . . . . . . . . . . . . . . . . . 224

New Clothing Donated to ElementarySchool Children . . . . . . . . . . . . . . . . . . 225

First $400 of Foreign Purchases Hand-CarriedInto California . . . . . . . . . . . . . . . . . . . . 226

Charitable Donations Made by Sellers . . . . 227

Auctions Involving NonprofitOrganizations . . . . . . . . . . . . . . . . . . . . 228

Sales by Thrift Stores OperatedBy Nonprofit Organizations . . . . . . . . . 229

Other Programs

Option to Pay Tax on CostRather Than Lease Receipts . . . . . . . . 230

Tax Liability on “Bad Debts” . . . . . . . . . . . . 231

Acquisition Sale-LeasebackArrangements . . . . . . . . . . . . . . . . . . . 232

Factory-Built School Buildings . . . . . . . . . . . 233

Endangered Animal and Plant Species . . . . 235

Investments by Manufacturers . . . . . . . . . . . 236

Page 129

„„„„ SALES AND USE TAX—OVERVIEW

This section provides information on taxexpenditure programs (TEPs) associated withthe sales and use tax paid by individuals andbusinesses. These TEPs affect the amount ofGeneral Fund and special funds revenuesraised by the sales and use tax, the secondlargest source of state revenues. These TEPsalso have an impact on local governmentrevenues since (except in certain instances)the programs affect both the state and localportions of sales and use tax receipts. Thefollowing provides a brief description of thistax.

GENERAL BACKGROUNDINFORMATION

The sales and use tax is levied on thegross receipts of personal property sold ortransferred to an individual or business con-sidered to be the final consumer. The salesand use tax actually consists of two comple-mentary taxes:

• Sales Tax. The sales tax portion is themore familiar of the two taxes and islevied on the total purchase price oftangible personal property sold inCalifornia, except for items specifi-cally exempted from taxation by law.

• Use Tax. In contrast, the use tax gen-erally applies to the storage, use, orother consumption in this state ofgoods purchased from retailers intransactions not subject to the salestax, generally for purchases shippedinto California from another state.

The following example is helpful in dem-onstrating how the use tax works. If an auto-mobile is purchased in Oregon by a Califor-nia resident who intends to use the vehicle inCalifornia, then the individual would pay theCalifornia use tax on the retail price of thecar. Without a use tax, such a consumer couldavoid paying a tax on a vehicle to be usedwithin California, by purchasing it outsidethe state and then bringing it into California.State automobile registration requirementsmake feasible the collection of the use tax onvehicles brought in from out of state. Centralregistration requirements also facilitate thecollection of use tax for water vessels, aircraft,and mobilehomes. For other types of pur-chases, registered taxpayers involved in salesactivities are required to report taxable out-of-state purchases on their quarterly salesand use tax returns.

Collection Responsibility. A seller is re-sponsible for remitting the sales and use taxto the state, although he/she may try to“pass” the tax on to the purchaser throughhigher prices. The extent to which the salesand use tax is passed on to the purchaserthrough higher prices is dependent on thesupply and demand characteristics of theparticular commodity and market involved.Regardless of who bears the ultimate finan-cial burden or “incidence” of the tax, how-ever, the seller is legally responsible for col-lecting and remitting all tax payments to theBoard of Equalization (BOE), the state agencyin charge of administering the sales and usetax.

Sales and Use Tax—Overview

Page 130

CHARACTERISTICSOF THE CALIFORNIASALES AND USE TAX

Tax Rate. The sales and use tax was firstimposed in California in 1933.The tax rate hasgenerally increased since that time, althoughthere have been periodic decreases as well.Additions and subtractions to the sales anduse tax base have also taken place throughchanges in exempted transactions.

The basic sales and use tax rate consists ofboth a state rate and a local rate. Figure 1 pro-vides a breakdown of the current tax ratelevied in California.

Figure 1

Sales and Use Tax Rates

StateGeneral Fund 5.00%Local Revenue Fund .50Local Public Safety Fund .50

Subtotal 6.00%LocalUniform Local Taxes (Bradley-Burns) 1.25%Optional Local Taxesa 1.50

Subtotal 2.75%

Total 8.75%a

Maximum optional local rate, except for San Francisco City andCounty (1.75 percent), San Mateo County (2 percent), and SanDiego County (1 percent).

Source: Board of Equalization

• State Tax Rate. The current state salesand use tax rate is 6 percent. As Fig-ure 1 shows, 5 percent of the statesales and use tax rate is dedicated tothe General Fund. In addition, a0.5 percent rate is dedicated to theLocal Revenue Fund, which is ear-marked for health and welfare costsassociated with the 1991 state-localgovernment realignment program. Asecond 0.5 percent state tax levy is

dedicated for local public safety pro-grams and is allocated directly tolocalities through the Local PublicSafety Fund. Figure 2 summarizeshow the state’s General Fund tax ratehas changed from the mid-1930s tothe present.

• Local Tax Rate. As shown inFigure 1, the Bradley-Burns UniformLocal Tax is a 1.25 percent levy, con-sisting of a 1 percent tax that is allo-cated to local governments for generalpurposes and a 0.25 percent levy thatis dedicated for county transportationpurposes. Localities also have theoption of imposing, with voter ap-proval, up to a 1.5 percent transac-tions and use tax. (San Francisco Cityand County and San Mateo County,however, are allowed to exceed thismaximum rate by 0.25 percent and0.5 percent, respectively.) Some ofthese local revenues may be used forgeneral purposes, but they have pri-m a r i l y b e e n i m p o s e d f o rtransportation-related purposes.

Figure 2

State Sales and Use Tax Rates(General Fund)

Tax Rate

1933-34 2.50%1935-42 3.001943-48 2.501949-66 3.001967-71 4.001972 3.751973 4.751973 3.751974-90 4.751991-92 5.501993 to present 5.00

Source: Board of Equalization

Given the above, the combined state-localsales and use tax rate in California varies bycounty. As shown in Figure 3, actual rates as


Page 131

Figure 3

Sales Tax Rates Vary by County

As of January 1, 1999

7.25%a

7.75%b

8.00% or morec

a Includes Stanislaus, Nevada and Solano (7.38 percent) and Sonoma (7.50 percent).b Includes Fresno (7.88 percent).c Includes: Santa Cruz (8.00 percent); Alameda, Contra Costa, Los Angeles,

San Mateo, and Santa Clara (8.25 percent); and San Francisco (8.50 percent).

of January 1, 1999, ranged from a low of7.25 percent to a high of 8.5 percent. The esti-mated revenue reductions shown in the fol-lowing TEP reviews include effects on boththe state and local governments.

Tax Base. The sales and use tax base con-sists of all items that are potentially taxableunder current law, minus various exemptionsand exclusions (the latter are discussed indetail in the reviews that follow). In general,any tangible asset that is moveable (that is,not permanently attached to property) whichis sold and subsequently used, consumed, orstored in California is subject to the sales anduse tax. However, there are some generalexceptions to this rule, including the follow-ing:

• Federal Government Purchases. Thefederal government, its agencies andinstrumentalities that are deemedwholly owned by the federal govern-ment, various federally related con-tract activities, and the American RedCross, are exempt from state and localsales and use taxes.

• Out-of-State Sales. Goods deliveredto an out-of-state purchaser for useoutside of California are exempt fromCalifornia’s state and local sales anduse taxes.

• Resale Purchases. Goods purchasedby a business which are subsequentlyresold as part of an intermediarytransaction are exempt from the stateand local sales and use tax. This in-cludes both certain materials that willbe incorporated into a final product,and finished products purchased forresale (such as furniture or artworkpurchased by an interior designer thatwill be resold to clients).

While items purchased outside of Califor-nia and transported into and used within thestate are technically subject to the use tax, only

in cases where there are centralized registra-tion requirements or the purchases are madeby registered sales tax payers does the stateactually collect the tax. For example, no usetax is collected from individuals who pur-chase goods through mail-order, Internet, orother related means.

In addition, California generally does notdirectly tax services when these represent thefinal product (although there are a limitednumber of exemptions to this general rule,such as photocopying services and gift wrap-ping services). However, services that con-tribute to the production or delivery of atangible product sold are indirectly subject tothe sales and use tax through the explicit orimplicit incorporation of the cost of suchservices in the price of the tangible product.Such services include, for example, food ser-vice at restaurants and assembly and deliveryactivities.


Page 132

Sales and Use Tax

Page 133

Exclusion/Exemption:

GAS, ELECTRICITY, WATER, STEAM, AND HEAT

Program Characteristics Estimated Revenue Reduction

Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation CodeSection 6353.

(In Millions)

Fiscal Year Amount

1996-97 $3,000

1997-98 3,156

1998-99 3,264

DESCRIPTIONThis program exempts from taxation the saleor transfer of gas, electricity, water (includingsteam), and geothermal brines or other heatsources delivered through mains, lines, orpipes. It also exempts water sold to an indi-vidual in bulk quantities (50 gallons or more)for household use, when the residence is notserved by mains, lines, or pipes. In addition,the program exempts the transfer of steam,heat, or other energy produced bycogeneration technologies.

RATIONALEThe basic exemption for gas, electricity, andwater dates back to the inception of the salestax in 1933, when companies providing theseservices were subject to a gross receipts taxthat was levied in lieu of other taxes underthe State Constitution. The original tax ex-emption merely recognized that the Constitu-tion prohibited the imposition of other taxes,such as the sales tax, on these companies.Although these constitutional provisionswere subsequently repealed, the exemptionnevertheless remained in effect.

Currently, there are two apparent rationalesfor this program. First, gas and electric billsare subject to municipal utility user taxes inmany cities, often at rates higher than the

sales tax rate. Thus, it is argued by some thatthe sales tax exemption avoids subjecting gasand electricity to double taxation.

Second, this program provides tax relief toconsumers of gas, electricity, and water to theextent that sales and use taxes normallywould be incorporated into the pricescharged for these items. Proponents arguethat these utilities provide basic and neces-sary services and, as such, such servicesshould not be made any more costly to con-sumers by imposing the sales tax on them.

The exemption, however, is not limited toresidential gas and electricity service. Rather,it also includes commercial and industrialpurchases of electricity and natural gas, towhich the “necessity of life” rationale doesnot apply.

COMMENTSCities were receiving around $700 millionfrom utility user taxes as of the late 1980s, butcounties were not permitted to impose suchlevies. However, legislation at the start of the1990s (Chapter 466, Statutes of 1990 [SB 2557,Maddy]) extended to counties the authorityto levy such utility user taxes. In 1995-96,cities and counties raised approximately$1.3 billion from the utility users tax.

Sales and Use Tax

Page 134

It is not clear that electricity, which is not aphysical object or substance, would be subjectto sales taxation even in the absence of thisprogram.

Sales and Use Tax

Page 135


ORGANIC PRODUCTS GROWN

EXPRESSLY FOR FUEL PURPOSES



Authorization: California Revenue and Taxation CodeSection 6358.1 (a)(1).

(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the saleor transfer of organic products grown ex-pressly for fuel purposes.

RATIONALE

This program provides an incentive for theproduction and use of organic products asfuel. It accomplishes this to the extent that itreduces the cost of buying or using organicfuels, thereby making them more attractiverelative to conventional fuel sources. Theapparent underlying rationale for the pro-gram is to reduce the economy's reliance ondepletable fossil fuels—especially crude oil—and to encourage profitable alternative usesof farmland.

COMMENTS

Grain purchases by an alcohol producer gen-erally would be exempt, even in theabsence of this program, as a purchase forresale. However, growers of organic prod-ucts, such as wood, that are sold for directuse as fuel do benefit from this program.

A detailed review of this program appearedin Volume I, Part Two, of our Analysis of the1987-88 Tax Expenditure Budget. This reviewrecommended that the program be main-tained on the basis of (1) tax equity (sincecompeting energy sources are not taxed), and(2) administrative savings to the Board ofEqualization from not having to establishtaxable values for the exempt items.

Sales and Use Tax

Page 136


AGRICULTURAL , TIMBER, MUNICIPAL, AND INDUSTRIAL

WASTE BY-PRODUCTS



Authorization: California Revenue and Taxation CodeSection 6358.1 (a)(2).

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor transfer of qualified waste by-productsfrom (1) agricultural and forest-productsoperations, (2) municipal refuse, and (3) man-ufacturing activities. In order to qualify, theseby-products must be used as fuel in an indus-trial facility in lieu of either oil, natural gas, orcoal.

RATIONALE

This program provides an incentive for in-dustry to use waste by-products as an alter-native fuel. It accomplishes this to the extentthat it reduces the cost of buying or usingwaste by-product fuels, thereby making themmore economically attractive relative to con-ventional fuel sources. The underlying ratio-nale for the program is to reduce theeconomy's reliance on fossil fuels, especiallycrude oil, and to encourage the more effectiveand complete utilization of scarce resources.The program also equalizes the taxation ofwaste-fuel materials that are purchased withthose that are self-generated.

COMMENTS

This program was established byChapter 1248, Statutes of 1980 (SB 1576,Nielsen), and was permanently extended byChapter 254, Statutes of 1986 (SB 1083,Boatwright). The program was amended byChapter 1059, Statutes of 1983 (SB 1031,Boatwright) to delete the original require-ment that qualifying by-products be “deliv-ered in bulk.” This change ensured that theprogram would apply to waste by-productsconsumed at the same site where they aregenerated, such as the burning of wood chipsin a lumber mill.

A detailed review of this program appearedin Volume I, Part Two, of our Analysis of the1987-88 Tax Expenditure Budget. This reviewrecommended that the program be main-tained on the basis of tax equity (sincecompeting sources of fuel are not taxed), andthe administrative savings to the Board ofEqualization from not having to establishtaxable values for the exempt items.

Sales and Use Tax

Page 137


USE OF REFINERS' GAS



Authorization: California Revenue and Taxation CodeSection 6358.1 (b).

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the useof “still gas” which has been produced as aby-product during the refining of purchasedcrude oil.

RATIONALE

The underlying rationale for the program isto equalize the tax treatment of still gas usedby refiners who purchase their crude oil, withthose who use oil they produce themselves. Itis agrued that the program also encouragesresource conservation through more efficientuse of crude oil supplies.

COMMENTS

The use of still gas produced from propri-etary (that is, nonpurchased) petroleum is notsubject to the use tax, because state law re-

quires that a formal transfer of a productoccur in order to “trigger” a tax levy.

This program was established by Chapter1059, Statutes of 1983 (SB 1031, Boatwright),as declarative of existing law under Chapter1248, Statutes of 1980 (SB 1576, Nielsen),which provided a tax exemption for wasteby-products derived from manufacturingactivities. This program was permanentlyextended by Chapter 254, Statutes of 1986(SB 1083, Boatwright).

A detailed review of this program appearedin Volume I, Part Two, of our Analysis of the1987-88 Tax Expenditure Budget. This reviewrecommended that the program be main-tained on the basis of tax equity (since com-peting sources of fuel are not taxed) and theadministrative savings to the Board of Equal-ization from not having to establish taxablevalues for refiners' gas.

Sales and Use Tax

Page 138


ANIMAL LIFE



Authorization: California Revenue and Taxation CodeSection 6358 (a).

(In Millions)

Fiscal Year Amount

1996-97 $43

1997-98 46

1998-99 47

DESCRIPTION

This program exempts from taxation the saleor transfer of animal life, the products ofwhich ordinarily constitute food for humanconsumption.

Purchases of dairy cows and of any livestockor poultry for breeding (or egg laying) pur-poses ordinarily would be subject to salesand use taxes in the absence of this program.This is because these animals are put to useby the purchaser, rather than simply fattenedand resold, as with most beef cattle.

RATIONALE

This program provides tax relief to producersof animal-based food products, by eliminat-ing the sales and use taxes that ordinarilywould apply to animals that are not pur-chased solely for resale. By reducing the costof producing animal-based food items, theprogram benefits consumers to the extent thatthese lower production costs reduce retailfood prices. As such, this program basically isan extension of the sales and use tax exemp-tion for food. The underlying rationale of-fered for the program is that food is a basicnecessity of life, and that its price should notbe increased by taxation.

Sales and Use Tax

Page 139


ANIMAL FEED



Authorization: California Revenue and Taxation CodeSection 6358 (b).

(In Millions)

Fiscal Year Amount

1996-97 $191

1997-98 201

1998-99 207

DESCRIPTION

This program exempts from taxation any saleor transfer of animal feed which is fed toqualified animals. Qualified animals arethose whose products either ordinarily con-stitute food for human consumption, or are tobe sold in the regular course of business.

RATIONALE

This program provides two basic types of taxrelief. First, it provides tax relief to consumersof animal-based food products by reducingthe prices of these products. As such, thisaspect of the program basically is an exten-sion of the sales and use tax exemption forfood. The underlying rationale offered for

this aspect of the program is that food is abasic necessity of life, and its price, therefore,should not be increased by taxation.

The second type of tax relief provided by theprogram is to consumers of nonfood animalproducts, to the extent that sales and usetaxes on feed ordinarily would be incorpo-rated into these products' prices. The ratio-nale offered here is that feed is a “componentpart” of an item which subsequently is itselfsubject to taxation and, therefore, should notbe double-taxed. An example is the use offeed to raise animals, the pelts of which areused to make coats, which in turn are subjectto sales taxes.

Sales and Use Tax

Page 140


SEEDS AND PLANTS



Authorization: California Revenue and Taxation CodeSection 6358 (c).

(In Millions)

Fiscal Year Amount

1996-97 $24

1997-98 25

1998-99 30

DESCRIPTION

This program exempts from taxation the saleor transfer of seeds and plants whose prod-ucts either ordinarily constitute food for hu-man consumption, or are to be sold in theregular course of business.

RATIONALE

This program provides two basic types of taxrelief. First, it provides tax relief to consumersof seed and plant-related food products byreducing their prices. As such, this aspect ofthe program basically is an extension of thesales and use tax exemption for food. Theunderlying rationale for this aspect of theprogram is that food is a basic necessity of lifeand its price, therefore, should not be in-creased by taxation.

The second type of tax relief provided by theprogram is to consumers of nonfood productsthat are derived from qualifying seeds andplants, to the extent that sales and use taxesordinarily would be incorporated into theprices of these seeds and plants. The rationalehere is that these items are “componentparts” of products which, themselves, aresubsequently taxed and, therefore, should notbe subjected to double taxation. An exampleis the purchase of flower seeds by a nurseryin order to grow flowers, which themselvesare taxed when sold to consumers.

COMMENTS

Chapter 323, Statutes of 1998 (AB 2798,Machado), extended this sales tax exemption,formerly limited to annual plants, to peren-nial plants.

Sales and Use Tax

Page 141


QUALIFIED FERTILIZER



Authorization: California Revenue and Taxation CodeSection 6358 (d).

(In Millions)

Fiscal Year Amount

1996-97 $48

1997-98 50

1998-99 52

DESCRIPTION

This program exempts from taxation thetransfer of fertilizer to be used on land, if theland is used to produce either food for hu-man consumption or other products to besold in the regular course of business.

RATIONALE

This program provides two basic types of taxrelief. First, it provides tax relief to consumersof food products grown with the help of fer-tilizer, by reducing their prices. As such, thisaspect of the program basically is an exten-sion of the sales and use tax exemption forfood. The underlying rationale offered forthis aspect of the program is that food is abasic necessity of life, and its price, therefore,should not be increased by taxation.

The second type of tax relief provided by theprogram is to consumers of nonfood productswhich fertilizer helps produce, to the extent

that sales and use taxes on fertilizer ordi-narily would be incorporated into these prod-ucts' prices. The underlying rationale offeredhere is that the fertilizer is a “componentpart” of an item which subsequently is, itself,subject to taxation and, therefore, should notbe double-taxed. An example is the use offertilizer by a nursery in growing flowers,which themselves are taxed when sold toconsumers.

COMMENTS

For the purposes of this program, the term“fertilizer” includes commercial fertilizers,agricultural minerals, and manures, but doesnot include soil amendments. The latter areexcluded on the basis that they do not consti-tute a “component part” of the grown prod-ucts, but rather are capitalized into land val-ues. Such soil amendments include hay,straw, peat, leaf mold, sand, potting medi-ums, and specified mineral and chemicalconstituents.

Sales and Use Tax

Page 142


POULTRY LITTER



Authorization: California Revenue and Taxation CodeSection 6358.2.

(In Millions)

Fiscal Year Amount

1996-97 $1

1997-98 1

1998-99 1

DESCRIPTION

This program exempts from taxation the saleor use in California of certain products thatare used as litter in poultry and egg produc-tion and that in turn are ultimately resold as,or incorporated in, fertilizer products. Thisexemption applies to wood shavings, saw-dust, rice hulls, or other related products.

RATIONALE

This program provides two types of tax relief.First, it provides tax relief to consumers thatpurchase fertilizer products. Second, it providesindirect tax relief to consumers of food andnonfood products which fertilizers help to pro-duce, again to the extent that the product priceswould reflect the sales and use tax paid on thecomponents incorporated in the fertilizers.Program proponents note that the program isconsistent, at least to some extent, with therelated program for qualified fertilizer.

Sales and Use Tax

Page 143


FOOD PRODUCTS



Authorization: California Constitution, Article XIII,Section 34, and California Revenue andTaxation Code Sections 6359, 6359.2,and 6359.4.

(In Millions)

Fiscal Year Amount

1996-97 $2,480

1997-98 2,609

1998-99 2,698

DESCRIPTION

This program generally exempts from taxa-tion the transfer of food products for homeconsumption (other than carbonated or alco-holic beverages). The program does not ex-tend to sales of most prepared food, includ-ing take-out food items and restaurant meals.

Special rules apply to vending machine salesof otherwise nontaxable food items, such ascandy. Generally, 33 percent of the receiptsfrom these sales are taxed as an approxima-tion of the portion of these sales that other-wise would be taxable because they are itemsconsumed on the same premises as the vend-ing machine. Vending sales of any food itemcosting 15 cents or less, or of any bulk fooditems (such as nuts) costing 25 cents or less,are fully exempt from taxation. This is accom-plished by treating these retailers as the con-sumers of the items that they sell. Since thefood products are exempt when purchasedby the vendor (under the general food ex-emption), this treatment is equivalent to a fulltax exemption.

RATIONALE

This program provides tax relief to consum-ers of food products, by reducing their price.The underlying rationale put forth for the

program is that food is a basic necessity of lifeand, therefore, its price should not be in-creased through the application of the salestax.

COMMENTS

Although the basic rationale offered for thisprogram is to exempt food products fromtaxation because they are a necessity of life, itshould be noted that the term “necessity” issomewhat loosely, and even inconsistently,applied. For example, restaurant meals andmost take-out foods are taxed. This treatmentgenerally is justified on the grounds that theyare luxuries, or at least a convenience, com-pared with cooking at home. However, someof these taxable foods also appear to be neces-sities, if purchased by an individual lackingcooking facilities.

In addition, in the case of food products thatqualify under this program, there is no at-tempt to restrict the quality or cost of ex-empted items. For instance, the programapplies to high-grade or expensive products,which do not constitute basic necessities.

In 1991, the Legislature passed legislationthat would levy the sales and use tax onsnack foods. "Snack foods" were defined to

Sales and Use Tax

Page 144

include products that were sold in a condi-tion suitable for immediate consumption,such as cookies, potato chips, and snackcakes. The legislation (Chapter 85, Statutes of1991, [AB 2181, Vasconcellos] and Chapter 88,Statutes of 1991, [SB 179, Deddeh]) met withsome resistance and confusion among tax-

payers and retailers, especially with regard tocertain apparent inconsistencies. For exam-ple, pre-popped popcorn was subject to taxa-tion but unpopped popcorn was not. The so-called "snack tax" was repealed by Proposi-tion 163, approved by the voters in Novem-ber 1992.

Sales and Use Tax

Page 145


CANDY, GUM, AND CONFECTIONERY PRODUCTS



Authorization: California Constitution, Article XIII,Section 34, and California Revenue andTaxation Code Section 6359(b).

(In Millions)

Fiscal Year Amount

1996-97 $199

1997-98 210

1998-99 217

DESCRIPTION

This program generally exempts from taxa-tion the sale or use of candy, gum, and otherconfectionery products for home consump-tion. This program is included within theoverall food exemption and is subject to thesame limitations. Vending machine sales ofcandy, gum, and other confectionery prod-ucts may be subject to tax under certain con-ditions (see discussion under the previousprogram entitled “Food Products”).

RATIONALE

This program provides tax relief to producersof candy and to candy consumers by reduc-

ing the prices of such products. The pro-gram’s rationale is that candy, gum, and con-fectionery items also constitute food productsand as such, deserve the same tax exemptiongranted for food generally.

This exemption was repealed effectiveJuly 15, 1991 as part of a broadening of thesales and use tax base. The exemption wasreinstated in November 1992 as part of Prop-osition 163 and was incorporated into theCalifornia Revenue and Taxation Code Sec-tion covering food products.

Sales and Use Tax

Page 146


BOTTLED WATER



Authorization: California Constitution, Article XIII,Section 34, and California Revenue andTaxation Code Section 6359(b).

(In Millions)

Fiscal Year Amount

1996-97 $85

1997-98 90

1998-99 93

DESCRIPTION

This program exempts from taxation thetransfer or use of noncarbonated and non-effervescent bottled water.

RATIONALE

This program provides tax relief to the con-sumers of bottled water. The underlyingrationale offered for the program is that wa-ter is a basic necessity of life. Many individu-als use bottled water because of impuritiesand other related problems with the qualityof their normal water supplies.

COMMENTS

The statute allowing the exemption (Califor-nia Revenue and Taxation Code Section6359[b]) was repealed effective July 15, 1991as part of a broadening of the sales and usetax base. The exemption was reinstated aspart of Proposition 163 in November 1992,and was incorporated into the CaliforniaRevenue and Taxation Code Section coveringfood products (see previous program entitled“Food Products”).

Sales and Use Tax

Page 147


PACKING ICE AND DRY ICE




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of ice and dry ice, when the ice isused or employed in packing and shippingqualified food products for human consump-tion by qualified carriers.

RATIONALE

Proponents of this program argue that it isneeded to equalize the tax treatment of pack-ing ice and dry ice with that of various othercompeting cooling processes. These variousother means of cooling (such as forced airand chilled water baths) are not directly sub-ject to sales and use taxation because they are“processes” and not tangible personal prop-erty (as is ice). The program also has beenrationalized on the grounds that coolants areneeded to provide consumers with unspoiledfood products, many of which are, them-selves, exempt from taxation because they areviewed as basic necessities of life.

COMMENTS

This program became operative on January 1,1986 as provided by Chapter 1045, Statutes of1985 (AB 1887, Areias). An earlier programhad been in effect for ice used in interstatetransportation only, until its repeal in 1979 byChapter 1150, Statutes of 1979 (AB 66, Lock-yer).

The rationale that this program is needed toequalize the tax treatment of ice with that ofother cooling methods overlooks the fact thatthe equipment for these alternative coolantsystems generally is subject to sales and usetaxation at the time it is purchased. A de-tailed review of this program appeared inPart Two of our Analysis of the 1988-89 TaxExpenditure Budget. In our review, we foundno evidence that this program was havingany significant impacts on the basic economiccompetitiveness of the affected Californiaindustries, or on prices paid by consumers.Accordingly, in the interests of tax equity, werecommended that this program be repealed.

Sales and Use Tax

Page 148


CARBON DIOXIDE USED IN PACKAGING




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the saleor use of carbon dioxide used in packing,shipping, or transporting fruits or vegetablesfor human consumption, provided that thefruits and vegetables are not sold with thecarbon dioxide packaging and any nonre-turnable materials containing carbon dioxide.To qualify for the exemption, the fruits orvegetables must be shipped or transported inthe carbon dioxide packaging by commoncarriers, contract carriers, or proprietary carri-ers.

RATIONALE

This program provides tax relief to consum-ers of fruits and vegetables that have beenpacked and shipped. The underlying ratio-nale for the program is that food productssuch as fruits and vegetables are basic neces-

sities of life, and therefore, their price shouldnot be increased through taxation. This pro-gram also attempts to equalize tax treatmentof carbon dioxide packaging with other typesof packaging (such as dry ice and forced air)that are used to provide consumers withunspoiled food products. These alternativetypes of packaging also are exempt fromtaxation as described under separate pro-grams.

COMMENTS

As discussed in the program entitled “Pack-ing Ice and Dry Ice,” this program may resultin a tax advantage of exempt methods overcertain other cooling methods. While coolingmethods such as forced air and chilled waterare not directly taxed, the equipment for thesecoolant systems is generally taxed whenpurchased.

Sales and Use Tax

Page 149


PRESCRIPTION MEDICINES



Authorization: California Revenue and Taxation CodeSections 6369 and 6369.1.

(In Millions)

Fiscal Year Amount

1996-97 $652

1997-98 686

1998-99 709

DESCRIPTION

This program exempts from taxation the saleor use of specified medicines and medi-cal-related products used for treating thehealth problems of human beings. Itemswhich qualify for the program include medi-cines which are: (1) prescribed by a physicianand dispensed by a registered pharmacist;(2) furnished by a licensed physician, dentist,or podiatrist to patients; (3) furnished by ahealth facility to patients pursuant to theorder of a licensed physician; (4) sold to alicensed physician or health facility for treat-ing human beings; (5) sold to the state orother political subdivision for use in treatinghuman beings; and (6) furnished withoutcharge by a pharmaceutical manufacturer ordistributor to a licensed physician, health

facility, or institution of higher learning forresearch which will be used to treat humanbeings. In addition to medicines, qualifyingitems include such medical products as pros-thetic and orthotic devices, hemodialysisproducts, insulin syringes, sutures, bonescrews, and artificial limbs and eyes.

RATIONALE

This program provides tax relief to consum-ers of certain medicines and medical-relatedproducts. The underlying rationale for theprogram is that the price of medicines shouldnot be increased by taxation because propermedical care and treatment is a basic necessity.

Sales and Use Tax

Page 150


SPECIFIED MEDICAL-RELATED PRODUCTS



Authorization: California Revenue and Taxation CodeSections 6369.1, 6369.2, and 6369.5.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleand use of the following medical-relatedproducts for personal use as directed by aphysician: (1) wheelchairs, crutches, canes(including white canes for the blind), andwalkers (including their replacement parts);(2) medical oxygen delivery systems;(3) hemodialysis equipment supplied byprescription; and (4) containers used to col-lect or store human blood.

RATIONALE

This program provides tax relief to consum-ers of specified medical-related products. Theunderlying rationale for the program is thatsuch products are items of necessity to indi-

viduals who purchase them, and that theircost, therefore, should not be increased bytaxation.

COMMENTS

Qualifying “medical oxygen delivery sys-tems” include, but are not limited to, liquidoxygen containers, high pressure cylindersand regulators, when sold, leased, or rentedto an individual for personal use under thedirection of a physician. This program raisescertain issues relating to tax equity and con-sistent tax-law treatment, since items such ascorrective eyewear and auditory devices arenot exempt from taxation, yet are used to treatmedical conditions.

Sales and Use Tax

Page 151


MEDICAL IDENTIFICATION TAGS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation thetransfer of medical identification tags fur-nished by a qualified nonprofit organization.The term “medical identification tags” in-cludes any tag worn by a person for the pur-pose of identifying the wearer as having amedical disability or allergic reaction to cer-tain medical treatments.

RATIONALE

This program provides tax relief to individu-als who need to wear medical informationtags because of health-related problems. Therationale for the program is that the prices ofsuch tags should not be increased by taxation,

because the tags are a necessity for manyindividuals with serious health problems.

COMMENTS

This program was originally sponsored bythe Medic Alert Foundation, a charitablenonprofit corporation engaged in gathering,storing, and furnishing information regard-ing the medical problems of members. Whenan individual subscribes to the Medic AlertFoundation, he or she has the option of pur-chasing either a bracelet or a necklace onwhich relevant medical emergency informa-tion is engraved. Such products also areavailable from various other similar types oforganizations.

Sales and Use Tax

Page 152


SPECIFIED MEDICAL HEALTH INFORMATION




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the useof medical health information literature pur-chased by qualified organizations. Such qual-ifying organizations must be formed andoperated for charitable purposes, be eligiblefor the welfare exemption (a local propertytax exemption available to nonprofit, charita-ble organizations), and be engaged in thedissemination of medical health information.In addition, the purchase of qualified litera-ture must be made from the organization'snational office or another branch of the na-tional office of the same organization. Theoriginal purchase of these materials, from aprinter for example, is not covered by theexemption.

RATIONALE

This program provides tax relief for organiza-tions providing educational health informa-tion, and thereby enables these organizationsto use their limited resources more effectivelyfor educational purposes. The underlyingrationale for the program is that the dissemi-nation of medical health information is so-cially beneficial.

COMMENTS

The original proponent of this program wasthe American Heart Association. Prior to theinception of this program, sales and use taxeswere levied on the medical information thatthe association distributed to its regional andlocal chapter affiliates.

Sales and Use Tax

Page 153


HEALTH AND SAFETY INSIGNIA AND

EDUCATIONAL MATERIALS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of health and safety insignia andeducational materials routinely sold in con-nection with health, safety, and first aidclasses. The program requires the insigniaand materials to be sold or purchased by anational charitable organization which quali-fies for the welfare exemption (a local prop-erty tax exemption available to nonprofit,charitable organizations). In addition, thematerials must be purchased from the organi-zation's national office or another branch orchapter of the national office of that organiza-

tion.

RATIONALE

This program offers tax relief to organizationsproviding specified health-related and safety-related materials and educational informa-tion, and for individuals who might purchasethem. Thus, the program encourages thewider dissemination of these materials andinformation. The rationale for the program isthat such materials and information are so-cially beneficial and worthy of public finan-cial support.

Sales and Use Tax

Page 154


FOOD ANIMAL MEDICINES



Authorization: California Revenue and Taxation CodeSection 6358 (e).

(In Millions)

Fiscal Year Amount

1996-97 $2

1997-98 4

1998-99 4

DESCRIPTION

This program exempts from taxation the saleor use of drugs or medicines for which theprimary purpose is the prevention and/orcontrol of disease in animal life that ordi-narily constitutes food for human consump-tion.

RATIONALE

This program provides tax relief to consum-ers of medical products used on animal lifethat is used to produce animal food productsconsumed by humans. This follows the gen-eral rationale that food products are a basicnecessity of life, and their prices should notbe increased by taxation.

Sales and Use Tax

Page 155


MEDICATED FEED AND DRINKING WATER




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation thegross receipts from the sale, storage, con-sumption, or use of drugs or medicines ad-ministered to animal life as an additive tofeed or drinking water. The primary purposeof the additive must be prevention and con-trol of disease in food animals or nonfoodanimals which are sold in the regular courseof business.

RATIONALE

This program provides two types of tax relief.In the case of food animals, it provides tax

relief to consumers of animal-based foodproducts. This may be viewed as an extensionof the general sales tax exemption for foodproducts, which is based on the rationale thatfood is a basic necessity of human life and itsprice should not be increased by taxation.

The rationale for providing an exemption formedicines and drugs used to treat nonfoodanimals is that the cost of such treatment isincorporated in the price of these animals,which is subject to taxation. Thus, it is ar-gued, taxing it separately would result indouble taxation.

Sales and Use Tax

Page 156


PRINTERS' AIDS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the fab-rication or transfer of composed type or re-production proofs, which are made by a ty-pographer for the preparation of printedmatter. In addition, this program exemptsfrom taxation the fabrication of reproductionproofs or impressed mats when the materialsare transferred to a printer or publisher foruse in printing.

RATIONALE

This program provides tax relief to the print-ing industry assuming sales and use taxes ontransfers of qualified printers' aids normallywould be borne by printers. Traditionally,printers' aids often became the property ofthe customer, so that they were subject to sales

tax. These intermediate products of the print-ing process, however, were used to makefinal printing materials, which also weretaxed upon their sale. This program thusreduces the degree of this sales tax “pyramid-ing” for the printing industry. It also tends toequalize tax treatment for printers' aids, re-gardless of the specific arrangements maderegarding the transfer of printers' aids.

COMMENTS

Many other industries are subject to taxpyramiding, but the printing industry hasargued that it was particularly hard hit by themultiple application of the sales and use tax.Newer computerized printing and publishingmethods produce few, if any, intermediateprinter's aids, so that the revenue loss fromthis program should decrease over time.

Sales and Use Tax

Page 157


PARTNERSHIP PROPERTY USED TO

PRODUCE MOTION PICTURES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the useof property rented, leased, or otherwise fur-nished by a partnership to its members forthe production of motion pictures under cer-tain circumstances. In order to qualify for theprogram, the partnership must be formed byparties engaged in the production or distribu-tion of motion pictures in order to reduceproduction costs, by sharing equipment, stu-dio facilities, and personnel. The exemptiondoes not apply, however, if the partnershiptransfers title of any property to its members.In addition, the program does not exemptfrom taxation the original purchase of prop-erty by the partnership.

RATIONALE

This program provides benefits to some seg-ments of the motion picture industry by re-ducing the costs they incur for using sharedmovie-making equipment and fabrication

labor. It is rationalized on the grounds that ittends to equalize the taxation of equipmentand fabrication labor provided “in-house”(say, in a vertically integrated movie com-pany) with the taxation of these items whenseveral studios or independent producersshare these resources. The program thus re-moves a tax advantage that otherwise wouldbenefit integrated studios (firms which areinvolved in the full range of movie-makingactivities) versus other motion picture pro-ducers.

COMMENTS

The basic structure of the sales and use taxinherently benefits businesses that are verticallyintegrated. This is because intracompany trans-fers of equipment and supplies are not consid-ered a sale and, thus, are not taxed. This pro-gram extends an equivalent benefit tononvertically integrated operations in this par-ticular industry.

Sales and Use Tax

Page 158


NEWSPAPERS AND PERIODICALS, DISTRIBUTED

FREE OF CHARGE OR BY SUBSCRIPTION



Authorization: California Revenue and Taxation CodeSections 6362.3, 6362.7, and 6362.8.

(In Millions)

Fiscal Year Amount

1996-97 $68

1997-98 72

1998-99 74

DESCRIPTION

This program exempts from taxation the saleor use of certain newspapers, periodicals, andany tangible personal property that becomesan ingredient or component of them. Theexemption is available provided that a news-paper or periodical is regularly published (atleast four times a year). In addition, the itemmust be: (1) distributed free of charge; or(2) sold by subscription and delivered bymail or common carrier; or (3) purchased orpublished by an organization that qualifiesfor tax-exempt status under Internal RevenueCode Section 501(c)(3) and meets certainother requirements. The exemption also ap-plies to any newspaper or periodical that issold by subscription pursuant to an agree-ment entered into and for which prepaymentwas received prior to July 15, 1991.

The term “periodical” is defined as meetingcertain stated publication intervals during ayear, with each issue bearing some relation tothe previous issues. It does not includeprinted sales messages, shopping guides, orpublications where advertising exceeds90 percent of the printed area of an issue in

more than one-half the issues published in a12-month period.

RATIONALE

This program provides tax relief to the pub-lishers of qualified newspapers and periodi-cals, and to the consumers of these items.Proponents of this program contend that thecontents of a newspaper or periodical areakin to an information service and, thus, thetransfer of a newspaper or periodical isequivalent to the sale of a service. Because thetransfer of services is generally exempt fromsales and use taxation, these proponents thusargue that the transfer of other newspapersand periodicals also should be exempt.

COMMENTS

Generally, paid newspaper subscriptions aresubject to taxation, since the publishers ofsuch newspapers have “nexus,” or sufficienteconomic presence in California for tax pur-poses. Some newspapers published out-of-state, however, have insufficient presence inCalifornia to trigger the levying of the salesand use tax.

Sales and Use Tax

Page 159


LEASES OF MOTION PICTURES



Authorization: California Revenue and Taxation CodeSections 6006 (g)(1) and 6010 (e)(1).

(In Millions)

Fiscal Year Amount

1996-97 $29

1997-98 31

1998-99 32

DESCRIPTION

This program exempts from taxation thequalified lease or rental of motion pictures(including animated motion pictures), televi-sion films, and tapes (except video rentals forprivate use).

RATIONALE

This program provides tax relief to the own-ers and users of motion pictures and televi-sion shows. The apparent rationale for theprogram is to encourage expansion of themarket for motion pictures and tapes in Cali-fornia by reducing the cost of leasing suchpictures, and thereby promoting the eco-nomic health of the motion picture industry.Proponents of the exemption also argue thatit is needed to provide tax equity betweenexhibitors of motion pictures and tapes ver-sus other forms of entertainment, such as live

theater, that are not subject to the sales anduse tax. There are, however, many forms ofentertainment which are subject to sales anduse taxes, such as videocassette rentals,books, and games.

COMMENTS

The estimated revenue reduction amountsshown above are based only on leases tomovie theaters in California, because thesetransactions involve the transfer of a physicalcopy of the movie. Television programming,on the other hand, can be and often is trans-ferred via satellite or phone lines. Thus itwould not be subject to taxation, even in theabsence of this program. Consequently, theadditional revenues that would be realizedfrom taxing leases of television programmingwould be relatively small.

Sales and Use Tax

Page 160


MASTER TAPES AND MASTER RECORDS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation qualify-ing transfers of master tapes and master re-cords that are used by the recording industryin making sound recordings. The sales taxdoes apply, however, to purchases of the tan-gible elements of such master tapes and re-cordings (for example, the cost of the blanktape) when these are acquired from a record-ing studio by a tape or recording producer.

RATIONALE

This program provides tax relief to the con-sumers of master tapes and records by reduc-ing the prices of these items. At the time thisprogram was enacted, it was rationalized onthe basis that the value of a master tape orrecord was primarily attributable to the intan-gible element of the music or other informa-

tion stored on the tangible medium. The pro-ponents of this exemption argued that it wasnot proper for the state to tax the value ofsuch intangible elements.

COMMENTS

In 1988, the California Court of Appeals heldthat in certain circumstances the sale or leaseof master tapes and records are not exemptfrom taxation. Specifically, in A&M Records,Inc. v. State Board of Equalization (1988 [204Cal. App. 3d 358]), the court determined thatthe contract to purchase master tapes or re-cords used for producing additional masterrecordings or copies was a taxable transaction.The court held, in this case, that the true ob-ject of the contract was for the production ofsuch duplicates and not for the services of theartist.

Sales and Use Tax

Page 161


PRINTED ADVERTISING MATERIALS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of catalogs, letters, circulars, brochures,and pamphlets consisting substantially ofprinted advertisements for goods and ser-vices. To qualify, these materials must be(1) printed to the special order of the pur-chaser and (2) mailed or delivered by theseller, seller's agent, or a mailing housethrough the United States Postal Service, orby common carrier to another person, at nocost to the recipient.

RATIONALE

This program provides tax relief to Californiaprinters and retailers. The rationale for theprogram is to provide tax equity for Califor-nia printers. When a California retailer con-tracts with an out-of-state printer to print itsadvertising, the printing job is not subject tosales tax. In the absence of this program, asimilar contract with a California printerwould be subject to sales tax. Program propo-nents argue that the program is necessary tomake California printers competitive without-of-state printers.

COMMENTS

This program was established byChapter 1515, Statutes of 1986 (SB 2527, Rob-

bins), and took effect on January 1, 1987. Analternative way to provide tax equity forCalifornia printers in the absence of this pro-gram would be to apply the use tax to printedadvertising materials purchased fromout-of-state printers by California firms. Incases where the out-of-state printer sends theadvertising material directly to Californiarecipients, there had been concern that im-posing the use tax would unconstitutionallyinterfere with interstate commerce. That con-cern appears to have been erased by a 1988decision of the U.S. Supreme Court (D.H.Holmes Co. v. McNamara, 48 U.S. 24, 100L Ed2d 21, 108 S Ct 1619). In that case, the courtunanimously upheld Louisiana's impositionof use tax on catalogs printed outside thestate for a Louisiana retailer and delivereddirectly to prospective customers in Louisi-ana.

It is estimated that the total value of all cata-log, directory, and printed advertising prod-ucts generated for use in California is in thebillions of dollars. If all such products weresubject to taxation, the sales tax liabilitiescould be several hundred million dollars.However, this figure dramatically overstatesthe revenue loss to the state due to this pro-gram, for two reasons. First, an unknownnumber of these products are already subjectto taxation. For example, catalogs that are

Sales and Use Tax

Page 162

sold to consumers are taxed, as are manyother advertising materials. Second, an un-known portion of these products would notbe subject to taxation, even if this programwere repealed. For example, according to the

Board of Equalization, advertising inserts inmany newspapers would continue to be ex-empt from taxation under the exemption fornewspapers and periodicals.

Sales and Use Tax

Page 163


MOTION PICTURES AND PRODUCTION SERVICES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation chargesfor qualified production services (so-called“fabrication labor”) used in the production ofa motion picture (including videos, or anyother commercial audiovisual works). Theseservices include the production of specialeffects, animation, music, sound, editing, andphotography, regardless of whether the ser-vice is performed under the producer's super-vision or done independently. The exemptiondoes not include the production of duplicatetapes for exhibition or broadcast, or releaseprints.

Additionally, the program exempts transfersof all or part of qualifying motion pictures, orany interest or rights to them (including par-tially finished work and intermediary materi-als). To qualify, the motion picture must ei-ther be (1) sold before it is first exhibited orbroadcast to its general audience, or (2) trans-ferred to any persons holding exploitationrights which they gained prior to the firstexhibition.

These exemptions do not apply to (1) thetransfer of raw film or videotape stock, (2) thetransfer of release prints or tapes for exhibi-tion or broadcast, or (3) rentals or leases ofvideocassettes, videotapes, or videodiscs for

private use. The term “qualified motion pic-ture” does not include motion pictures pro-duced for private noncommercial use, such asweddings or graduations.

RATIONALE

This program has several rationales. First, itprovides an incentive for retaining motionpicture production activities in California byreducing the industry's tax burden.

A second rationale is that the program sim-plifies tax administration. Before this pro-gram was established, the taxability ofcharges for special effects and other produc-tion services depended on whether theseservices were performed by studio employeesor contractors supervised by the producer (inwhich case they were not taxable) versus bycontractors operating independently (inwhich case they were taxable). Taxation wascomplex because it often was difficult to dis-tinguish among the various contractual rela-tionships involved.

A third program rationale is to create taxequity between studio employees and con-tractors who perform the same kinds of work,as well as tax equity between integrated pro-ducers that produce a finished work and those

Sales and Use Tax

Page 164

that specialize in one segment of the work, suchas filming or postproduction editing.

COMMENTS

Fabrication Labor. Although services them-selves generally are not subject to the salesand use tax, fabrication labor used to make anitem of tangible property generally is subjectto tax. For example, charges by a tailor tomake a suit are taxable even if the customerprovides the cloth. This treatment providestax equity between custom-made productsand off-the-shelf products. However, there isno tax on fabrication labor if it is provided byemployees of the same company that uses thefinished product (since no sale or transfer ofproperty occurs), or, in many cases, if thelabor is performed under the supervision,and subject to the approval of the customer.

As regards the activities affected by this pro-gram, the creation of special effects for mo-tion pictures usually involves the productionof tangible property (a film or video product)that is an intermediary product used to incor-porate the special effect into the final motionpicture. In the absence of this program, thesale of that intermediate product to a pro-ducer by a contractor who is not supervisedby that producer generally would be taxable.

Sales of Motion Pictures. Sales of completedmotion pictures prior to their commercialexhibition are considered a sale for resale andwould not be taxable, even in the absence ofthis program. In contrast, sales of rough foot-age or other intermediary products for a mo-tion picture in progress generally would betaxable in the absence of this program.

Sales and Use Tax

Page 165


MOBILE TRANSPORTATION EQUIPMENT LEASES



Authorization: California Revenue and Taxation CodeSections 6006 (g)(4), 6010 (e)(4), and6023.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the leaseof certain mobile transportation equipmentused in the transportation of persons or prop-erty. Qualifying equipment includes railroadcars and locomotives, buses, trucks, trucktractors, truck trailers, dollies, bogies, chassis,reusable cargo containers, aircraft, ships, andtangible personal property which is or be-comes a component part of such equipment.Equipment which does not qualify for theprogram includes one-way rental vehicles,passenger vehicles, and trailers and baggagecontainers designed to be hauled by passen-ger vehicles. The purchase of mobile trans-portation equipment by the lessor, however,is generally subject to sales and use tax.

RATIONALE

This program provides tax relief to users ofqualifying transportation equipment by re-

ducing its price. According to the Board ofEqualization, the program has several ratio-nales. One involves the administrative com-plexities of determining the portion of leasingpayments that is related to interstate com-merce activities, which are exempt from taxa-tion. Another relates to the difficulty of sepa-rating out the portion of lease payments asso-ciated with the provision of related services,such as maintenance, which are non-taxable.

COMMENTS

Existing law allows lessors of mobile trans-portation equipment to elect to pay tax onlease receipts, rather than on the equipment'scost at the time of purchase. However, thisoption is available only to lessors who makeno use of the equipment other than renting orleasing it.

Sales and Use Tax

Page 166


VESSELS THAT TRANSPORT OVER 1,000 TONS


Tax Type: Sales Tax.


(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from the sales tax thesale of certain vessels sold by their builder. Inorder for the program to apply, the vesselinvolved must be capable of transportingcargoes of more than 1,000 tons. The programdoes not, however, exempt such vessels fromthe use tax.

RATIONALE

The program was originally intended to elim-inate a tax “penalty” for purchases of vesselswithin the state by equalizing their taxationwith those purchased outside the state butused within it. At the time this program wasenacted, it was thought that the purchase ofa vessel from an out-of-state builder for usewithin the state could not be taxed by theState of California, due to limitations under

the U.S. Constitution involving state taxationof interstate commerce.

COMMENTS

The program’s original rationale was super-seded by a 1942 federal court ruling involv-ing the taxability of vessel purchases. Specifi-cally, in the case of Los Angeles Lumber Prod-ucts v. State Board of Equalization (45 Fed.Supp. 77), the court ruled that the U.S. Con-stitution does not prohibit a ship purchasedout of state for in-state use from being taxedby California. Thus, the use tax applies toships purchased out-of-state and used inCalifornia unless the operators qualify forother use tax exemptions (see program enti-tled "Qualified Watercraft and Their Compo-nent Parts.")

Sales and Use Tax

Page 167


VEHICLES MODIFIED FOR PHYSICALLY

HANDICAPPED PERSONS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleand use of items and materials used to mod-ify vehicles for physically handicapped per-sons. In the event of the sale of such a vehicleto a qualified purchaser, the program alsoexempts from taxation the portion of the salesprice of a vehicle attributable to handicappedmodifications. In order to qualify, the vehiclepurchaser must be eligible for a disabledlicense plate or placard for disabled parking.

RATIONALE

This program provides tax relief to physicallyhandicapped persons who must rely on spe-cially modified vehicles, such as thosewith wheelchair lifts and special steeringdevices. The underlying rationale for theprogram is that access to vehicles with specialmodifications is a necessity for many handi-capped persons, and one that can imposefinancial burdens on them since their in-come-earning potential often is restricted.

Sales and Use Tax

Page 168


NEW OR REMANUFACTURED TRUCKS AND TRAILERS

FOR OUT-OF-STATE USE




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of new or remanufactured trucks, trucktractors, trailers, semitrailers, trailer coaches(any of which has an unladen weight equal toor exceeding 6,000 pounds), or auxiliary dol-lies purchased in California for use outsidethe state or in interstate or foreign commerce.

All of the above types of vehicles and equip-ment qualify for the tax exemption if the vehicleis: (1) purchased by an out-of-state residentfrom an out-of-state dealer, (2) delivered by themanufacturer to the purchaser within Califor-nia, (3) taken out of the state within 30 days,and (4) registered in another state. These quali-fications must be furnished in writing to themanufacturer or remanufacturer.

A somewhat broader exemption applies onlyto trailers and semitrailers. These vehiclesmay be purchased from either an in-state orout-of-state dealer, and they may be deliv-ered by either the manufacturer,remanufacturer, or dealer within California.The exemption applies if they are (1) pur-chased for out-of-state use or for interstate orforeign commerce, (2) taken out of the statewithin a specified time period, and (3) regis-

tered in another state. If the trailer orsemitrailer is manufactured out-of-state, thepurchaser has 30 days to take it out of Cali-fornia. If the vehicle is manufactured in Cali-fornia, the purchaser has 75 days to remove itfrom the state. The purchaser does not haveto be an out-of-state resident.

RATIONALE

This program benefits California manufactur-ers of trucks and trailers, and California deal-ers who sell trailers and semitrailers. In theabsence of this program, purchases of quali-fying equipment for out-of-state use fromCalifornia manufacturers or from Californiadealers (for trailers and semitrailers) could besubject to the sales or use tax if delivery wereto be taken at the manufacturer's or dealer'sCalifornia location. Proponents argue thatsuch a tax would discourage these purchases.

One rationale of the program is that it en-sures that purchases for out-of-state use arenot taxed. A second rationale for the programis that it stimulates the California trailer-coach manufacturing and remanufacturingindustry.

Sales and Use Tax

Page 169

COMMENTS

By making delivery outside California, themanufacturer or dealer could arrange toavoid any California sales or use tax liabilityon the transaction, even in the absence of thisprogram. This is because the transactionwould be classified as an interstate sale,

which is not taxable. Given this, the actualrevenue loss due to this exemption probablyis relatively small. The primary effect of theprogram is to facilitate sales by Californiatruck and trailer manufacturers and dealers,and to reduce their costs of delivering vehicles.

Sales and Use Tax

Page 170


PROPERTY USED IN SPACE FLIGHTS




(In Millions)

Fiscal Year Amount

1996-97 $7

1997-98 8

1998-99 12

DESCRIPTION

This program exempts from taxation the saleor use of qualified property used in spaceflights originating in the state. Qualifiedproperty includes: (1) property that has spaceflight capabilities including orbital spacefacilities, satellites, and space vehicles;(2) property used aboard any space facility,vehicle, satellite, system, or station; and(3) fuel sold exclusively for space flight. Thisprogram still applies in the event of a failure,postponement, or cancellation of a launch ofthe qualified space property.

RATIONALE

This program provides a tax incentive for theuse of facilities located in California as the

origin of space flights versus other similarlyequipped facilities in other states. The pro-gram also conforms to general sales and usetax policy with respect to purchases of goodsused exclusively outside of California.

COMMENTS

Pursuant to Chapter 323, Statutes of 1998(AB 2798, Machado), this program was ex-panded to include equipment and propertypurchases related to all space flight activity inthe state. Formerly, the program was applica-ble only to space flights originating atVandenberg Air Force Base. The sunset dateof January 1, 2004 was also eliminatedthrough this legislation, extending the pro-gram indefinitely.

Sales and Use Tax

Page 171


AIRCRAFT REPAIR AND RELATED EQUIPMENT




(In Millions)

Fiscal Year Amount

1996-97 $11

1997-98 16

1998-99 16

DESCRIPTION

This program exempts from taxation the saleor use of tangible personal property pur-chased after October 1, 1996 that is used as acomponent part of specified commercial air-craft as a result of maintenance, repair, over-haul, or improvement. Qualifying aircraftmust be used for business either as a commoncarrier or outside of California.

RATIONALE

This program allows California aircraft main-tenance and repair businesses to reduce theprices at which their products are provided,thereby making this industry more competi-

tive with those in other states. This programalso equalizes tax treatment for this industrywith the railroad industry (which also has itsown sales and use tax exemption for equip-ment used in maintaining or repairing rail-roads). This is important to the extent that thetwo industries compete as common carriers

COMMENTS

California is one of many states that has asales and use tax exemption for aircraft repairequipment. The program thus prevents Cali-fornia from being placed at a competitivedisadvantage with respect to airline hub activities.

Sales and Use Tax

Page 172


RAILROAD AND RELATED EQUIPMENT



Authorization: California Revenue and Taxation CodeSections 6368.5 and 6411.

(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the saleor use of tangible personal property used asa component part of qualified railroad equip-ment in the course of repairing, cleaning,altering, or improving that equipment out-side of California. Qualifying railroad equip-ment includes locomotives and passengercars and maintenance equipment used by orleased to a common carrier engaged in inter-state or foreign commerce.

RATIONALE

This program allows California railroadmaintenance and repair businesses to reducethe prices at which their products are pro-vided, thereby making this industry morecompetitive with those in other states orcountries. Because the equipment involved isinstalled in railroads engaged in interstate orforeign commerce, it often can be purchasedin other states or countries. Exempting the

equipment from the California sales and usetax allows businesses to reduce the prices onthe equipment sold, thus making it morecompetitive with other states or countries.This program also attempts to equalize taxtreatment between the railroad industry andthe airline industry (which also has a salesand use tax exemption for equipment used inmaintaining or repairing aircraft). This wouldbe important to the extent that the two indus-tries compete as common carriers.

COMMENTS

Although this program makes an attempt atequalizing tax treatment for competing in-dustries, the most direct competition withrailroads in the transportation of goodsacross state lines is the trucking industry.Since the trucking industry does not benefitfrom a similar program, this program wouldappear to grant advantageous tax treatmentto the railroad industry.

Sales and Use Tax

Page 173


LEASES OF SPECIFIED LINENS



Authorization: California Revenue and Taxation CodeSections 6006 (g) (2) and 6010 (e) (2).

(In Millions)

Fiscal Year Amount

1996-97 $40

1997-98 42

1998-99 44

DESCRIPTION

This program exempts from taxation the saleand use of linen supplies and similar articles.To qualify for the program, these suppliesand articles must be provided under a leaseagreement that includes recurring launderingand cleaning services. Linens exempt underthis program are taxable at the time of pur-chase by the lessor.

RATIONALE

This program gives tax relief to providers andconsumers of leased linen. Its apparent ratio-

nale is that most of the price charged for linensupplies represents the cost of the launderingand cleaning services, which would be ex-empt if provided separately.

COMMENTS

Generally, lessors have the option of payingsales and use tax on their original purchaseprice or on their lease receipts. Consequently,this program allows taxation of leased linenon the basis of its original purchase price.

Sales and Use Tax

Page 174


LEASES OF HOUSEHOLD FURNISHINGS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the leaseof household furnishings, when the furnish-ings are leased along with a lease of the livingquarters in which they are to be used. Thefurnishings are taxable, however, at the timeof purchase by the lessor.

RATIONALE

According to the Board of Equalization, thisprogram exists to facilitate tax administra-tion. Taxing the rental of furnishings in livingquarters would require registering and audit-ing landlords, who generally are not sellers ofany other taxable goods. Also, it would be

difficult to determine what portion of the rentis for the furnishings.

COMMENTS

Generally, landlords pay tax when they pur-chase furniture, and would not be taxed ontheir furniture rental receipts, even in theabsence of this program. This is because ofthe broader provision that allows lessors tochoose whether to pay tax on their originalpurchase amount or on their lease or rentalreceipts. The program equalizes tax treatmentbetween landlords that buy furniture to rent,versus furniture leased out by a rental company.

Sales and Use Tax

Page 175


FACTORY-BUILT HOUSING




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation 60 percentof the sales price of qualified factory-built hous-ing. "Factory-built" housing includes such typesas modular housing and sectionalized housing.The program does not exempt: (1) mobilehomes; (2) precut housing packages wheremore than 50 percent of the package consists ofprecut lumber only; (3) panelized construction(such as walls or components that may becomeone or more rooms of a building) that is not acomplete housing package; and (4) porches orawnings not purchased with a complete hous-ing package.

RATIONALE

This program attempts to equalize the sales anduse tax treatment of factory-built housing withthat of conventional housing. When a contrac-tor builds a conventional fixed-foun-dationhome, he or she normally pays sales and usetaxes on the tangible property that becomes apart of the home, such as lumber, paint, andwallboard. The home sale itself, however, is notsubject to the sales tax, since the tax is levied ontangible personal property only. Thus, only thevalue of the home due to the materials embod-ied in it, is subject to taxation.

This program applies a similar approach totaxing factory-built housing when sold by amanufacturer or dealer. Specifically, datafrom the industry indicate that about40 percent of the sales price of modular hous-ing represents the value of materials. Thus,this program excludes from taxation the re-maining 60 percent of the sales price not dueto materials.

COMMENTS

The Board of Equalization (BOE) Regulation1521 generally treats the purchase and instal-lation of modular buildings as constructioncontracts for sales and use tax purposes. Con-sequently, the manufacturer pays tax on ma-terials, and the purchaser pays tax only onthe value of fixtures (such as an air condi-tioner or stove). According to BOE, the totaltax liability under this regulation is similar tothe assumed tax liability under the sales anduse tax. Therefore, while this program givesstatutory weight to this type of treatment, itdoes not significantly affect tax revenuescompared with BOE's regulatory interpreta-tion of general sales and use tax law.

Sales and Use Tax

Page 176


NEW MOBILEHOMES



Authorization: California Revenue and Taxation CodeSections 6012.8 and 6012.9.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation25 percent of the sales price of a newmobilehome charged by the manufacturer tothe retailer, provided that the home is sold bythe retailer for installation on a foundationfor occupancy as a residence. (The sale of themobilehome by the retailer to the homeowneris fully tax-exempt.)

RATIONALE

The rationale for the program is based on thebelief that mobilehomes should be treated

like conventional housing for tax purposes.This program provides a measure of tax eq-uity between mobilehomes used on a perma-nent site versus conventional and factory-built housing. It does this by recognizing thata portion of the retail value of both conven-tional and factory-built housing is exemptfrom sales and use taxation. Specifically, inthe case of qualified factory-built housing, theexemption is equal to 60 percent of the con-sumer's purchase price. In the case of conven-tional housing, the difference between ahouse's selling price and the cost of taxablematerials to the builder is not subject to taxation.

Sales and Use Tax

Page 177


USED MOBILEHOMES




(In Millions)

Fiscal Year Amount

1996-97 $22

1997-98 23

1998-99 24

DESCRIPTION

This program exempts from taxation the saleor use of any used mobilehome that is subjectto the property tax.

RATIONALE

This program provides tax relief to the sellerof a used mobilehome and to its purchaser tothe extent that the reduced tax liability isreflected in lower selling prices. The rationalefor the program is to equalize treatment ofmobilehomes with that of conventional hous-ing, whose resales are not subject to sales anduse taxation.

COMMENTS

Any new mobilehome used as a residencepurchased after 1980 is automatically placedon the local property tax roll, and thereforewould not be subject to sales tax upon resale.

However, for new mobilehomes purchasedprior to 1980, the mobilehome owner maychoose whether to treat the mobilehome asproperty subject to the property tax or as avehicle. In the latter case, the owner wouldpay an annual licensing fee, and the buyerwould be liable for sales and use tax uponresale of the mobilehome.

Sales and Use Tax

Page 178


CUSTOM COMPUTER PROGRAMS




(In Millions)

Fiscal Year Amount

1996-97 $253

1997-98 266

1998-99 276

DESCRIPTION

This program exempts from taxation the saleof custom computer programs, other than abasic operational program (including a con-trol program). In addition, a program's docu-mentation manuals and storage media alsoare exempt from taxation.

RATIONALE

The rationale for this program is that sales ofqualified custom computer programs areprimarily service-type transactions and,therefore, not subject to taxation.

COMMENTS

This program was established in 1982 byChapter 1274, Statutes of 1982 (AB 2932,

Vasconcellos). That measure stated it was theLegislature's finding and declaration that thesales of custom programs, other than basicoperational programs, are service transac-tions not subject to any sales and use taxes.The measure further stated that the use ofany storage media in the transfer of customcomputer programs is only incidental to thetrue objective of the transaction, which is theperformance of a service. As such, the Legis-lature declared that the measure was declara-tory of, and not a change in, existing law.

The resale of a custom computer program issubject to tax, however, because the programwas not prepared to the special order of thepurchaser (Touche Ross & Co., v. State Board ofEqualization, 203 Cal. App.3d 1057, reviewdenied).

Sales and Use Tax

Page 179


CALIFORNIA GOLD MEDALLIONS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the saleor use of commemorative “California Gold”medallions.

RATIONALE

This program provides an incentive for indi-viduals to purchase commemorative Califor-nia Gold medallions, by lowering their price.

The program also equalizes the tax treatmentof these medallions with that of monetizedbullion, nonmonetized bullion, and certaincoins and medallions which are exempt (invalues of $1,000 or more) under Section 6355of the Revenue and Taxation Code. Propo-nents of this program argue that CaliforniaGold medallions are comparable to these

other items (such as South AfricanKrugerrands), because all can be used asmetallic stores of wealth and financial invest-ments.

COMMENTS

This program gives California Gold medal-lions an advantage over bullion coins (seeprogram entitled “Monetized Bullion, Goldand Silver Bullion, and Numismatic Coins”)by exempting all of their sales, not just thosefor $1,000 or more.

The Department of General Services wasrequired by Chapter 826, Statutes of 1982(AB 676, Kelley) to design a series of com-memorative California gold medallions towhich this program applies.

Sales and Use Tax

Page 180


MONETIZED BULLION, GOLD AND SILVER BULLION,AND NUMISMATIC COINS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of monetized bullion (coins whosevalue is essentially the same as that of themetal they contain), nonmonetized gold andsilver bullion, and numismatic coins (thesehave value beyond their metal content due torarity or aesthetic appeal), including goldmedallions struck under the authority of theAmerican Arts Gold Medallion Act. To qual-ify for the program, individual transactionsmust have a market value of $1,000 or more.

On or before September 1, 1994, and eachyear thereafter, the minimum market valueused to qualify for the program is to be ad-justed for inflation when the sum of the ad-justments equals or exceeds $500. Theinflation-adjusted amount is to be rounded tothe nearest $500.

RATIONALE

This program provides tax relief to purchas-ers and sellers of qualifying coins and bul-lion.

The program is rationalized on two basicgrounds. First, many buyers of coins or bul-

lion could avoid California sales tax by mak-ing purchases from dealers in other states,either in person or by mail. Although theywould be liable for use tax on these purchasesin the absence of this program, as a practicalmatter, the use tax is rarely collected on thesetypes of transactions. Thus, program propo-nents argue that the actual revenue loss fromthis program is minor, and that the exemp-tion promotes economic activity in Californiafrom coin and bullion sales, as well as en-abling buyers to deal with local businesses.

Second, proponents argue that the programincreases tax equity by equalizing tax treat-ment of coins and bullion with competinginvestment vehicles, such as stocks and realestate, which are not subject to the sales oruse tax.

COMMENTS

We reviewed this program in detail in ourReport on the 1988-89 Tax Expenditure Budget(Report 88-20, December 1988), pages 71-76.We concluded that, in the absence of thisprogram, most larger sales of bullion (in eithermonetized or nonmonetized form) wouldshift to out-of-state dealers, and the statewould collect relatively little additional reve-nue unless changes were made in federal

Sales and Use Tax

Page 181

laws that make collection of taxes on theseinterstate transactions more feasible. How-ever, we recommended repealing the exemp-tion for numismatic coins, because this exemp-

tion clearly conflicts with the state's generalpolicy of applying sales and use taxes toother collectibles, such as artworks and jewelry.

Sales and Use Tax

Page 182


RETURNABLE CONTAINERS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of returnable containers, when soldwith their contents, or when resold for refill-ing. A “returnable container” means a con-tainer that customarily may be returned bythe buyer of the contents for reuse. All othercontainers are classified nonreturnable con-tainers for the purpose of this program.

RATIONALE

This program provides tax relief to consum-ers of products sold in returnable containers

by reducing the price of such items. The pro-gram’s rationale is that the “price” chargedfor a returnable container often is a deposit,and applying the sales tax on each transac-tion could result over time in cumulative totalsales taxes that eventually might amount tomore than the value of the container itself.Thus, the program removes a disincentive tothe use of returnable containers, which areviewed as beneficial from a resource conser-vation and environmental perspective.

Sales and Use Tax

Page 183


CONTAINERS WHOSE CONTENTS ARE TAX-EXEMPT



Authorization: California Revenue and Taxation CodeSection 6364 (b).

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of filled containers whose contentsare not subject to the sales and use tax.

RATIONALE

This program provides tax relief to consum-ers of tax-exempt goods that are sold in con-tainers (such as most food products). Theprogram also benefits industries producingcontainerized packaging by encouraging itsuse. The main rationale for the program ap-pears to be that it lowers the prices at which

food and other tax-exempt goods may be soldto consumers. It also simplifies tax adminis-tration by eliminating the need to separatelystate the container prices.

COMMENTS

This program provides an indirect subsidy toconsumers who retain empty containers forsubsequent use. Examples of this include theuse of plastic milk cartons as water jugs, andplastic butter containers as kitchen food-storagebowls.

Sales and Use Tax

Page 184


ORIGINAL ARTWORKS AND DISPLAYS

FOR SPECIFIED MUSEUMS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTIONThis program exempts from taxation the saleor use of original works of art which are pur-chased (1) by a qualified nonprofit organiza-tion, (2) by a state or local government entity,or (3) for donation to a qualified governmententity or nonprofit organization. The exemp-tion applies only to art purchased to becomea permanent part of the collection of a quali-fied museum, local government entity, ornonprofit organization.

To qualify, a museum must either: (1) have asignificant portion of its space open to thepublic without charge; (2) be open to thepublic without charge for not less than sixhours per month during any month when themuseum is open to the public; or (3) be opento a segment of the student or adult popula-tion without charge. For a local governmententity to qualify, it must purchase or commis-sion art for public display in buildings, parks,plazas, or other public areas. Such areas mustbe open to the public at least 20 hours perweek for at least 35 weeks of the year. In thecase of a nonprofit organization, there are avariety of additional qualifying requirements.

This program also exempts museum piecespurchased for or by the San Diego Aerospace

Museum or the California Science Center.The exemption applies only to items whichhave value as museum pieces. It does notcover display cases, shelving, lamps, or otherproperty used in operation of the museum.

RATIONALEThis program provides an incentive for indi-viduals or organizations to donate, and forgovernment agencies and nonprofit organiza-tions to acquire, works of art that will bemade available to the public to enjoy. It doesthis to the extent that sales and use taxes onartwork ordinarily would increase the cost ofacquiring it. The program's underlying ratio-nale is that art and the displays provided byqualified organizations provide valuablecultural and educational benefits which areworthy of public financial support.

COMMENTSSeparate provisions were established to coverthe San Diego Aerospace Museum and the Cali-fornia Science Center, because some of theirmuseum pieces would not necessarily be called“works of art,” and thus would not qualify un-der the artwork exemption. These separate pro-visions extend the exemption to all of the mu-seum pieces of these two facilities.

Sales and Use Tax

Page 185


SINGLE-USE MAILING LISTS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts mailing lists from thesales and use tax where names and addressesor other information are recorded on mag-netic tapes or similar devices, and the con-tract regarding the mailing list restricts thepurchaser to a single use.

RATIONALE

This program provides tax relief to individu-als and institutions who have one-time access

to mailing lists. The program is rationalizedon administrative grounds, on the basis thatthe taxes collected from the one-time use ofsuch mailing lists would likely be exceededby the administrative costs of collection.

COMMENTS

This exemption would typically not apply tocorporations who conduct mail-order cam-paigns, since such activity requires the reuseof mailing lists.

Sales and Use Tax

Page 186


SALE-LEASEBACKS INVOLVING

CERTAIN GOVERNMENTAL ENTITIES



Authorization: California Revenue and Taxation CodeSections 6010.10, 6010.11, 6018.8, and6368.7.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of certain transportation, pollutioncontrol, or alternative energy equipmentwhen these transfers constitute sale-lease-backs or similar arrangements with desig-nated public agencies for financing purposes.The initial purchase of the equipment is notexempt from sales or use tax, however. Inorder to qualify, the equipment transfer mustfall into one of the following categories:

• Transfers of project property to theCalifornia Alternative Energy andAdvanced Transportation SourceFinancing Authority, and leases bythe authority back to pro-ject-participating parties.

• Transfers of pollution control equip-ment and facilities to the CaliforniaPollution Control Financing Author-ity, and leases by the authority backto project-participating parties.

• Transfers or leases of mass commut-ing vehicles (such as buses and railtransit cars) between transit operatorsand parties providing financing un-

der a “safe harbor” lease arrangementunder federal tax laws.

• Transfers of commuter vehicles (in-cluding railcars and locomotives, busand van fleets, and ferryboats) by theCalifornia Department of Transporta-tion (Caltrans), and leases of thesevehicles back to the department un-der sale-leaseback arrangements au-thorized by California GovernmentCode Section 14060 et seq.

RATIONALE

This program provides tax relief to purchas-ers of alternative energy and pollution con-trol equipment which receive financing assis-tance from state revenue bond authorities.The program also provides tax relief to transitagencies and Caltrans for transit and commu-ter vehicles financed through qualifyingsale-leaseback arrangements.

The program has two rationales. First, it isargued that alternative energy, pollutioncontrol, and transit programs are beneficial tosociety and, therefore, merit public financialsupport. The second rationale offered byprogram supporters is that, because the ex-empt transactions are not authentic sales or

Sales and Use Tax

Page 187

leases but merely “paper” transactions toobtain favorable financing terms, they shouldnot be taxed.

COMMENTS

This program predates enactment of Chapter558, Statutes of 1990 (AB 3382, Baker), whichprovides a general exemption from sales anduse taxes for property transfers made underqualifying acquisition sale-leaseback arrange-ments. In the absence of the special programs

discussed in this review, many of its specifi-cally exempted transactions probably wouldqualify for this general exemption (or couldbe structured to do so). In addition, sometransactions exempted under the programmight not be deemed by the courts to be tax-able sales or leases, even in the absence ofboth the special and general sale-leasebackexemptions, under the precedent establishedby Cedars-Sinai Medical Center v. State Board ofEqualization (162 Cal. App.3d 1182).

Sales and Use Tax

Page 188


MOTOR VEHICLE FUEL USED IN AIRPLANES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of qualified motor vehicle fuel usedto propel aircraft. (This exemption does notapply to aircraft jet fuel.) To qualify, the fuelmust be subject to the motor vehicle fuel taxand not be subject to refund.

RATIONALE

This program provides tax relief to ownersand users of certain aircraft. The rationale forthe program relates to the reason why motorvehicle fuel became subject to the sales anduse tax in 1972. Prior to that time, such fuelwas subject only to motor vehicle fuel excisetaxes. In 1972, however, fuel also becamesubject to sales and use taxation, a portion ofwhich is levied as a means of raising reve-nues for transportation-related purposes,including support of highways and masstransit. Because air transportation does not

benefit from the use of these revenues, motorvehicle fuel used in airplanes remained ex-empt from sales and use taxation.

COMMENTS

Motor vehicle fuel is subject to full state andlocal sales and use taxation, a portion of therevenues from which is dedicated totransportation-related purposes. The remain-ing portion is largely channeled into thestate’s General Fund for general purposes.The rationale for not taxing motor vehiclefuel for airplane use would not apply to theGeneral Fund portion of the sales and use tax.This portion is exempt for reasons of admin-istrative convenience and simplicity.

Jet aircraft fuel is not subject to the motorvehicle fuel tax. Rather, it is subject to a spe-cial aircraft jet fuel tax of 2 cents per gallon.

Sales and Use Tax

Page 189


FUEL SOLD TO AIR COMMON CARRIERS

FOR INTERNATIONAL FLIGHTS




(In Millions)

Fiscal Year Amount

1996-97 $19

1997-98 20

1998-99 20

DESCRIPTION

This program exempts from taxation the saleand use of fuel and petroleum products usedby air common carriers for immediate con-sumption on an international flight. An inter-national flight is defined as a flight whosefinal destination is a point outside of theUnited States.

Any fuel sold to a common carrier for useoutside the state after the first out-of-statedestination is exempt from taxation regard-less of this program, so that the net effect ofthis program is to exempt fuel used on the“first leg” of an international flight.

RATIONALE

This program benefits domestic producers ofjet fuel, and airlines that have internationalflights originating in California. It does so byreducing the price of fuel purchased in Cali-fornia for these flights. The program is ratio-nalized on the basis that it equalizes the taxtreatment of domestic fuel producers withthat of foreign fuel producers. Current federallaw prohibits states from taxing imported

fuel brought into the state under customsbond and transferred to common carriers foruse in foreign commerce. By applying a simi-lar exemption to domestically produced fuel,the program reduces the relative costs ofusing domestic fuel on flights, making itmore competitive with foreign fuel.

COMMENTS

This program was added by Chapter 1227,Statutes of 1988 (SB 1942, Craven), and be-came operative January 1, 1989, contingent onfederal exemption provided in Section 1309 ofTitle 19 of the United States Code. If the fed-eral prohibition on taxing foreign fuel used inforeign commerce is repealed, this programwill also be repealed at the same time.

Opponents of this program argue that, whilethe federal prohibition on taxing foreign fueldoes place domestic fuel producers at a com-petitive disadvantage, the problem shouldnot be addressed by a California state taxexemption on domestic fuel. Instead, effortsshould be made to have the federal prohibi-tion on taxing foreign fuel repealed.

Sales and Use Tax

Page 190


FUEL USED IN WATER COMMON CARRIERS




(In Millions)

Fiscal Year Amount

1996-97 $16

1997-98 17

1998-99 18

DESCRIPTION

This program exempts from taxation the saleand use of fuel and petroleum products usedby a water common carrier (such as a cruiseship or cargo freighter) after it has reached itsfirst out-of-state destination at which passen-gers or cargo are loaded or discharged. Thetaxpayer is required to furnish the seller offuel or petroleum products an exemptioncertificate in writing, specifying the quantityof fuel or petroleum products exempt fromsales and use taxation. This program sunsetson January 1, 2003.

RATIONALE

This program benefits domestic producers offuel and petroleum products sold to water

common carriers and interstate water com-mon carriers. It does so by reducing the priceof fuel purchased in California for these carri-ers. The program is rationalized on the basisthat the fuel purchased is being used outsideof California. Thus, it equalizes its tax treat-ment with that of other goods purchased inthe state solely for use outside of California.In addition, a portion of the sales tax is meantto raise revenues for transportation-relatedpurposes, including highways and mass tran-sit. Because water common carriers do notbenefit from the use of these revenues, it canbe rationalized that it should not be subject toat least this portion of the sales and use tax.

Sales and Use Tax

Page 191


MEALS AND FOOD PRODUCTS SERVED IN SCHOOLS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of qualified meals and food productsthat are furnished or served to students inschools (including colleges and universities).In order to qualify for the program, the foodmust be provided by a public or privateschool, a school district, a student organiza-tion, a parent-teacher organization, or certainblind persons.

RATIONALE

This program provides tax relief to studentswho consume meals and food products pro-vided by qualified persons and organizationsto the extent that taxes levied on such mealsand food products ordinarily would increasetheir prices. The program's rationale is thatproper student nutrition should be encour-aged and, therefore, the price of the foodshould not be increased by taxation. Theprogram is also justified on the grounds thatstudents may not have access to cookingfacilities, and this type of meal service may bethe only option for such individuals.

Sales and Use Tax

Page 192


HOT FOOD PRODUCTS SERVED

TO AIRPLANE PASSENGERS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of hot prepared food which is either(1) sold by caterers and other vendors to air-lines for consumption by passengers, or(2) sold or served to passengers by airlines.The program applies to air carriers engagedin interstate or foreign commerce.

RATIONALE

This program simplifies tax administrationby eliminating the need to allocate meals bystate on interstate flights between Californiaand other states. The program also provides

tax relief to the consumers of food on air-planes. The program's proponents have ar-gued that the exemption is appropriate be-cause providing food service is incidental toan airline's main service, which is to provideair transportation.

According to this argument, air travelers are“captive eaters,” having no choice as towhether food products will be made avail-able to them. Accordingly, the cost of themeal is incorporated in the price of the ticketwhether or not they choose to consume thefood provided. Thus, it is argued that suchmeals should not be subject to taxation.

Sales and Use Tax

Page 193


MEALS SERVED TO PATIENTS AND

RESIDENTS OF HEALTH CARE FACILITIES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of meals and food products which areserved to patients or residents of any of thefollowing (under certain conditions): (1) ahealth facility, (2) a community care facility,(3) a residential care facility for the elderly,(4) alcohol or drug abuse treatment facilities,or (5) a house or institution providing roomand board for the elderly.

RATIONALE

This program provides tax relief to consumersof meals and food products served at qualified

health care facilities, to the extent that sales anduse taxes levied on such products ordinarilywould be incorporated into the prices chargedfor them. The underlying rationales for theprogram are that (1) pro-viding proper nutri-tion for residents of health care facilities shouldbe encouraged and, therefore, the price of foodin such facilities should not be increased bytaxation, and (2) residents of these facilitiesgenerally do not have the alternative of cookingfor themselves.

Sales and Use Tax

Page 194


MEALS PROVIDED TO QUALIFIED LOW-INCOME

SENIOR CITIZENS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of meals and food products served tolow-income elderly persons by a nonprofitorganization or governmental agency undera program funded by the state or the U.S.government. To qualify for the program, ameal must be sold at, or below, cost.

RATIONALE

This program provides tax relief tolow-income senior citizens who consume

qualified meals. The underlying rationale forthe program is that providing proper nutri-tion to low-income senior citizens should beencouraged and, therefore, the price of foodserved to qualifying individuals should notbe increased by taxation.

COMMENTS

Many meal programs for low-income elderlypersons do not charge for the meals, andthose meals would not be subject to tax evenin the absence of this program.

Sales and Use Tax

Page 195


MEALS DELIVERED TO ELDERLY AND DISABLED

INDIVIDUALS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation thegross receipts from the sale, storage, use, orconsumption of meals that are delivered tohomebound elderly or disabled persons by anonprofit volunteer home-delivery mealprovider (such as “Meals on Wheels”).

RATIONALE

This program provides tax relief to thoseindividuals that must rely on such servicesfor their meals. Such services provide theproper nutrition to individuals who mightotherwise not be able to prepare similarmeals for themselves because of their limitedmobility. It also encourages nonprofit organi-zations that may provide such meals at re-duced prices to continue doing so.

Sales and Use Tax

Page 196


MEALS PREPARED IN COMMON KITCHEN FACILITIES

FOR QUALIFIED SENIOR CITIZENS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from sales and usetaxation meals or food products furnished toand consumed by qualified persons 62 yearsof age or older. The program applies, forexample, to food consumed by senior citizenswho reside in a condominium and own equalshares in a common kitchen, and for whomfood is served on a regular basis.

RATIONALE

The program provides tax relief to seniorcitizens living in housing that supplies roomand board. The program also equalizes thetax treatment of food served to senior citizensliving in independent settings with that ofpersons living in health care facilities. Theunderlying rationale for the program is thatproviding proper nutrition to senior citizensshould be encouraged and, therefore, theprice of the food served to qualifying individ-uals should not be increased by taxation.

Sales and Use Tax

Page 197


MEALS AND FOOD PRODUCTS SERVED BY

RELIGIOUS ORGANIZATIONS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation quali-fied meals and food products that are servedby a religious organization, or under its aus-pices. To qualify, the revenue obtained fromserving the meal or food must be used incarrying on the functions and activities of theorganization. In addition, only those organi-zations which qualify for the religious prop-erty tax exemption may qualify for this pro-gram.

RATIONALE

This program provides tax relief for needypersons who are provided meals at nominalcosts by religious organizations. Because theprogram reduces the price and/or cost of

providing a meal to a needy person, the pro-gram also encourages qualified organizationsto provide such meals. The underlying ratio-nale for this aspect of the program is thatproviding meals to needy persons is a so-cially beneficial activity.

COMMENTS

A “qualified” religious organization is de-fined as one which is exempt from propertytaxes under Article XIII, Section 3(f) of theCalifornia State Constitution. This propertytax exemption applies to buildings, land onwhich they are situated, and equipment,provided they are used exclusively for reli-gious worship.

Sales and Use Tax

Page 198


FOOD STAMP PURCHASES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation all pur-chases made with food stamps. When bothfood stamps and cash are used to purchasegoods, the amount of the food stamps is ap-plied to the cost of taxable items first.

RATIONALE

California enacted this program to complywith the Federal Food Security Act of 1985,which prohibits any state from participatingin the Food Stamp Program if that state taxesfood stamp purchases.

California generally exempts food productsfrom the sales and use tax, but some foodpurchases allowed under the food stampprogram are not covered under California'sgeneral food exemption (such as carbonatedsodas). Thus, a separate provision wasneeded to exempt such items when pur-chased with food stamps.

COMMENTS

This program will be repealed automaticallyif and when the federal government passeslegislation which repeals the prohibition onstate sales taxation of food stamp purchases.

Sales and Use Tax

Page 199


HEALTH CARE PROFESSIONALS

TREATED AS CONSUMERS



Authorization: California Revenue and Taxation CodeSections 6018, 6018.4, 6018.5, 6018.7,and 6020.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program provides a partial tax exemptionfor qualified health care items by treating variouslicensed health care professionals as if they werethe consumer (rather than the retailer) of itemsthat they provide to their patients and clients aspart of their professional services. As such, tax ispaid on the price that these professionals pay,rather than the price that they charge, for theseitems. Because the latter price typically is greaterthan the former price, less tax is paid. The pro-gram applies to the following professions anditems:

• Optometrists, physicians, surgeons,and dispensing opticians with respectto ophthalmic materials, includingeyeglasses and contact lenses.

• Chiropractors, with respect to vita-mins, minerals, dietary supplements,and orthotic devices.

• Podiatrists, with respect to prostheticmaterials and inlays, including arch-supports and special footgear.

• Hearing aid dispensers, with respectto hearing aids.

• X-ray providers, with respect to mate-rials and supplies for medical anddental x-rays, except for purely cos-metic purposes.

RATIONALE

This program provides tax relief to personswho purchase qualified items from healthcare professionals. This relief occurs to theextent that sales and use taxes levied on thefull retail value of such products (versus theircost to health care professionals) ordinarilywould increase their prices. The program’srationale is that these products are a compo-nent of good health care, which is a basicnecessity, and therefore, their prices shouldnot be subject to full taxation.

COMMENTS

This program and others like it, which definethe providers of goods as consumers, result inthe partial exemption of such products fromtaxation. The amount of the exemption is tiedto the value added to the product's retailprice by the provider. The basic cost of theproduct to the provider, however, is subjectto sales and use taxation.

Sales and Use Tax

Page 200


VETERINARIANS TREATED AS CONSUMERS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program treats a licensed veterinarian asa consumer (as opposed to as a retailer) of thedrugs and medicines used or furnished in theperformance of his or her professional ser-vices. As a consequence, the program par-tially exempts the retail value of such itemsfrom taxation.

RATIONALE

This program provides tax relief to the clien-tele of veterinarians. The amount of the taxrelief relates to the difference between theprice of such items to consumers and the costof such items to veterinarians. The underly-ing rationale for the program is that medi-cines and drugs prescribed for animals are anecessity for these creatures and therefore,

the price of the medicines should not be sub-ject to full taxation.

COMMENTS

The term “drugs and medicines” includessubstances necessary for the diagnosis, cure,mitigation, treatment, or prevention of ani-mal diseases. It excludes such items as sham-poos, pet foods, flea powders and sprays, andvitamins. The largest uses of veterinary drugsare totally exempt from taxation, however.This is because the Board of Equalization’sSales Tax Regulation 1587 (2) (b) and (c) in-cludes medicated feeds and drugs purchasedto formulate medicated feeds under the gen-eral exemption for animal feeds. Conse-quently, the revenue loss from this program,though unknown, is probably relativelysmall.

Sales and Use Tax

Page 201


AIRCRAFT FOR COMMON CARRIERS OR FOR USE BY

FOREIGN GOVERNMENTS OR NONRESIDENTS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of aircraft which are to be used eitheras common carriers or outside of California.The program also exempts from taxationtangible personal property sold to an aircraftmanufacturer and incorporated into suchaircraft.

In order for aircraft or tangible personalproperty to qualify for the exemption, theoperator’s annual gross receipts from com-mon carrier operations must either (1) exceedthe lesser of 20 percent of the purchase cost ofthe aircraft or $50,000 or (2) the operator mustprovide evidence that the property is used forcommon carrier purposes. For leased prop-erty, the comparable limits are 10 percent and$25,000.

RATIONALE

This program reduces the prices at which theCalifornia airplane industry sells airplanes,thereby making the industry more competi-tive.

COMMENTS

Although billions of dollars of sales are ex-empted from taxation under this program,little of that forgone tax liability would berealized in the program's absence. This isbecause aircraft sold to common carriers eas-ily could be delivered to them outside ofCalifornia. In that case, the transaction wouldbe an interstate or international sale that isnot subject to California taxation. Therewould be a compelling incentive to arrangesuch out-of-state purchase in most cases be-cause the amount of tax avoided could beseveral million dollars on a modern commer-cial jetliner.

Sales and Use Tax

Page 202


TRAILERS AND SEMITRAILERS

MOVED TO PLACE OF SALE



Authorization: California Revenue and Taxation CodeSection 6410, and California Vehicle CodeSection 4003.5.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTIONThis program exempts from taxation the use,storage, or other consumption in California ofnew or used semitrailers that (1) are not cur-rently registered in any state and (2) are oper-ated in the state for not more than five daysas part of a continuous trip to a place wherethe vehicle will be offered for sale. To qualifyfor the exemption, the trailer or semitrailermust have obtained a one-trip permit issuedby the California Department of Motor Vehi-cles. Under normal conditions, a use taxwould be levied on the use of the vehicle fortransporting goods in-state.

RATIONALEThis program provides tax relief to the opera-tors of trailers and semitrailers operating undera one-trip permit. When this program first wasestablished in 1986, the proponents offered therationale that operators should not be charged,in essence, twice for their use of roads. Theirview was that double-charging would occur inthe absence of the program because operatorsof laden trailers would be required to pay forboth (1) a one-trip permit and (2) use taxesbased on the rental or sale value of the trailer.

Another suggested rationale for this programis that it simplifies tax administration, by

relieving tax authorities from locating andassessing use taxes on one-trip operators.

COMMENTSNeither of the two rationales supporting thisprogram is entirely satisfactory. Regardingthe double taxation rationale, it fails to recog-nize that the use tax and the one-trip permitfee are for two separate purposes. In the caseof the rationale relating to administrativesimplicity, its significance is limited becauseuse taxes could be assessed at the same timeoperators are issued their one-trip permits.

Despite the weaknesses of the rationales,even if the Legislature chose to eliminate thisprogram, the state probably would realizerelatively little revenue gain. This is becausesimply moving an empty trailer to a place ofsale would not constitute a use that would besubject to tax. The effect of this program is tomake it economically feasible for these trail-ers to carry freight when they are moved to aplace of sale. In many cases, the earningsfrom this freight carriage would be less thanthe use tax, and trailer owners would there-fore simply move their vehicles unladen (thusgenerating no tax liability) if the exemptionwere not available.

Sales and Use Tax

Page 203


QUALIFIED WATERCRAFT AND THEIR

COMPONENT PARTS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from sales and usetaxation the sale, lease, or rental of a qualifiedwatercraft and its component parts (includ-ing parts used in repairing or maintaining thevessel). In order to qualify for the program,the craft must either be (1) used in interstateor foreign commerce for the transportation ofproperty or persons for hire, (2) used for com-mercial deep sea fishing operations outside ofCalifornia's territorial waters, or (3) used80 percent or more of the time in transportingfor hire property or persons to vessels oroffshore drilling platforms located outside ofCalifornia's territorial waters.

In order for a vessel to qualify as a commer-cial deep sea fishing vessel, the operator's

gross receipts from commercial fishing opera-tions must be at least $20,000 per year, or theoperator must provide evidence that the ves-sel is used for commercial deep sea fishing. Inorder to qualify as a watercraft used in inter-state or foreign commerce, the operator’sgross receipts must (1) exceed either10 percent of the cost of the watercraft or$25,000 or (2) provide evidence that the vesselis used for qualifying commercial purposes.

RATIONALE

This program allows California watercraftbuilders and dealers, and vessel maintenanceand repair businesses to reduce the prices atwhich their products may be provided,thereby making the California industry morecompetitive.

Sales and Use Tax

Page 204


VEHICLES, VESSELS, AND AIRCRAFT TRANSFERRED

WITHIN A FAMILY




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation thetransfer of vehicles, vessels, and aircraftwhen the property is sold by the purchaser'sparent, grandparent, child, grandchild,spouse, or brother or sister, (if both are mi-nors).

The exemption also applies when the sale isto a trust in which: (1) the seller has an unre-stricted power to revoke the trust; (2) the saledoes not result in any change in the beneficialownership of the property; (3) the trust pro-vides that, upon its revocation, the propertywill revert wholly to the seller; and (4) theonly consideration for the sale is the assump-tion by the trust of an existing loan for which

the tangible personal property being trans-ferred is the sole collateral.

RATIONALE

This program provides tax relief to personswho purchase vehicles, vessels, and aircraftfrom immediate family members. The pro-gram has two rationales. First, it is based onthe view that families should be treated asunits, so that transactions between familymembers should not be taxed. Second, itfacilitates tax administration becauseintrafamily transactions are typically not at“arms length,” and thus, the price paid couldbe difficult to determine and may not reflectthe true market value of the vehicle, vessel, oraircraft.

Sales and Use Tax

Page 205


NEW VEHICLES SOLD TO FOREIGN RESIDENTS

FOR FOREIGN SHIPMENT




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of any new, noncommercial vehiclemanufactured in the United States which ispurchased by a foreign resident for shipmentoutside of the United States. The purchasermust (1) be a foreign resident, (2) arrange forpurchase through an authorized dealer in theforeign country before arriving in the UnitedStates, and (3) obtain an “in-transit” permitfrom the California Department of MotorVehicles (DMV) which is valid for up to 30days. In addition, the retailer must ship ordrive the vehicle out of the United Statesprior to the expiration of the in-transit permit.

RATIONALE

The program's intent is to promote the pur-chase and export of American-made passen-ger vehicles, and to increase tourism in thestate. The program benefits foreign touristsby reducing the cost of purchasing an Amer-ican-made car in California. Foreign countriescurrently provide similar programs for Amer-ican citizens to purchase and operate vehiclesoverseas prior to their being shipped here.For California residents, such vehicles wouldbecome subject to the use tax upon registra-tion.

COMMENTS

This program was established byChapter 762, Statutes of 1989 (SB 442, Kopp)and became operative on January 1, 1990.

Sales and Use Tax

Page 206


OCCASIONAL SALES




(In Millions)

Fiscal Year Amount

1996-97 Major

1997-98 Major

1998-99 Major

DESCRIPTION

This program exempts occasional sales fromtaxation. An “occasional sale” is defined aseither of the following types of transactions:

• The transfer of tangible personalproperty (except vehicles, vessels, andaircraft, which have their own pro-gram) when the seller is not requiredto hold a seller's permit. (A sellerneed not hold such a permit if he orshe makes fewer than three sales for asubstantial amount of money in a12-month period.)

• Any transfer in which substantially allof the property held by an entity istransferred (except vehicles, vessels,and aircraft, which have their ownprogram), provided that the real orultimate ownership of such property issubstantially similar to that which ex-isted before the transfer. (This type oftransfer most commonly involves cor-porate acquisitions and/or mergers.)

RATIONALE

This program exists in order to simplify taxadministration. By exempting sales made bypersons with a small number of sales, theprogram greatly reduces the number of per-sons and businesses that must register andfile tax returns with the State Board of Equal-ization. Many of these additional sales wouldgenerate little additional revenue. For sales ofentire businesses, the program's rationale isthat these transactions are primarily changesin financial arrangements, as opposed toretail-related, even though the transfer oftangible property generally is included.

COMMENTS

This exemption constitutes a major tax expen-diture program from a fiscal perspective. Itrecognizes that enforcing sales tax collectionsby individuals making small private sales(such as a garage sale) is not realistically fea-sible. However, there is no limit on thevalue of any individual occasional sale, sothat a seller can in fact make large (thoughinfrequent) sales without incurring a tax liability.

Sales and Use Tax

Page 207


OCCASIONAL SALES OF VEHICLES,VESSELS, OR AIRCRAFT



Authorization: California Revenue and Taxation CodeSections 6281, 6282, and 6283.

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTIONThis program provides a sales tax exemptionfor occasional sales of vehicles, vessels, oraircraft. Specifically, any seller who is notrequired to hold a seller's permit for suchsales by reason of the number, scope or char-acter of the sales is exempt from the paymentof the tax. For instance, the sale of vehicles byindividuals would be exempt from taxation.

This program also exempts from taxation thetransfer of certain types of vehicles and otherproperty when, after the transfer, the real orultimate ownership of the property is sub-stantially similar to that which existed beforethe transfer. The program applies, amongother items, to certain mobilehomes, commer-cial coaches, vehicles, vessels, and aircraft,when such property is included in the sale ofan entire business that includes the transferof substantially all the assets of that business.

The program does not apply to sales of vehi-cles by a retailer who is licensed under theCalifornia Vehicle Code as a manufacturer,remanufacturer, dealer, or dismantler. Fur-ther, the exemption does not apply to therental payments made under a lease of tangi-ble personal property.

RATIONALEThe rationale for this program is to simplifyadministration of the sales tax. Sales of vehi-cles, vessels, and aircraft by individualsor businesses that do not regularly deal inthese items would be difficult to identify andtax. This is because the seller may not beregistered, or the sale is outside the seller'sregular sphere of activities.

The business-related program provides taxrelief to owners of businesses that are sold orreorganized. The program's rationale is thatthe real or ultimate ownership of the assets isunchanged.

COMMENTSThe program does not provide a use tax ex-emption. The buyer must pay use tax whenregistering the vehicle, vessel, or aircraft un-less some other exemption applies.

The business-related program is identical to theoccasional sale exemption provided for thetransfer of other property in the sale of an entirebusiness (see program entitled “OccasionalSales”). The occasional sale exemption, how-ever, specifically excludes vehicles, vessels, andaircraft, which are addressed in this exemption.

Sales and Use Tax

Page 208


OCCASIONAL SALES OF OTHER PRODUCTS BY

HAY PRODUCERS



Authorization: California Revenue and Taxation CodeSection 6006.5 (c).

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts a producer of hayfrom liability for sales and use taxes on occa-sional sales of tangible personal propertyother than hay. To qualify, the sales must notbe of such number, scope, and character thatthey would be taxable if the producer werenot also selling hay.

RATIONALE

This program provides tax relief to the con-sumers of tangible personal property, such astractors, sold by hay producers. The programis based on the rationale that it equalizestreatment of hay producers and other farm-ers. In the absence of this program, a farmerwho is required to hold a seller's permit be-cause some of his or her hay sales are taxable(for example, sales to private horse owners)would also be required to pay taxes when he

or she sells on an occasional basis any imple-ments used in producing the hay. (This isbecause all of the sales at retail of a personholding a seller's permit are subject to thesales and use tax.) However, as programproponents point out, other farmers, such aslettuce producers who conduct no taxableretail sales, do not have to hold a seller's per-mit and, consequently, do not have to collectsales tax on occasional sales of their farmequipment. This program extends this taxtreatment to hay farmers.

COMMENTS

Other businesses (such as manufacturers)which generally hold seller's permits but donot benefit from programs such as this, aresubject to the sales tax upon sales of tangibleassets of their business.

Sales and Use Tax

Page 209


MEMBERSHIP FEES CHARGED BY

CONSUMER COOPERATIVES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation themembership fees charged by consumer coop-eratives. The imputed value of any laborprovided to a cooperative by a member inlieu of monthly membership fees also is taxexempt. In the absence of this program, theBoard of Equalization could consider cooper-ative membership fees (both monetary andin-kind payments) as part of the purchaseprice of goods sold by consumer cooperativesand, therefore, taxable.

RATIONALE

This program provides tax relief to membersof consumer cooperatives to the extent thatsales and use taxes levied on membershipfees ordinarily would increase the costs ofbelonging to, and buying from, such coopera-tives. At the time the program was adopted,proponents argued that the membership feescooperatives levy are not directly related tothe prices they charge for products. Rather,they argued that cooperatives are akin toorganizations such as sports clubs, whosemembership fees are not directly related tothe frequency of facility use. Thus, the pro-gram's proponents argue that it provides taxequity between the cooperatives and otherorganizations such as private clubs.

Sales and Use Tax

Page 210


CLOTHING ALTERATIONS BY CLOTHES

CLEANING AND DYEING BUSINESSES




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program defines an operator of a quali-fied state-licensed clothes cleaning or clothesdyeing business as the consumer (as opposedto the retailer) of the materials and suppliesused or furnished in altering clothing. Whilethe operators pay sales taxes on these materi-als, the value of the alterations are exemptfrom the sales tax. Such operators thus paysales tax on the price they pay rather than onthe price they charge for the materials.

To qualify for the program, the business in-volved may receive no more than 20 percentof its gross receipts from the alteration ofgarments. Also, the business may operateonly as a pick-up and delivery point for gar-ment cleaning, or provide spotting and press-ing services (but not garment cleaning), or

operate a garment cleaning or dyeing planton the premises. In addition, 75 percent of thebusiness’ total receipts must representcharges for garment cleaning or dyeing ser-vices.

RATIONALE

This program provides tax relief to the cus-tomers of cleaners that have their clothesaltered. According to the State Board ofEqualization, the basic rationale for this pro-gram is that it simplifies the process of taxadministration. This is because, in the ab-sence of the program, many small cleaningestablishments would be required to registeras retailers, even though clothing alterationsare an incidental part of their overall operations.

Sales and Use Tax

Page 211


FLAGS SOLD BY VETERANS' GROUPS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program defines nonprofit veterans'organizations as consumers of the U.S. flagsthey sell, provided that the proceeds of thesales are used exclusively to further the pur-poses of the veterans' organization. As de-fined consumers, such organizations paysales tax on the price they pay rather than onthe price they charge for the flags they sell,resulting in a partial tax exemption based onthis price differential.

RATIONALE

This program provides an incentive for per-sons to support the activities of nonprofitveterans' organizations by granting tax reliefto those who purchase U.S. flags sold by theorganizations. The program has the effect ofpartially exempting the retail value of suchflags from taxation, thereby increasing theirmarketability. The underlying rationale forthe program is the view that the purposesand activities of veterans' organizations areworthy of public financial support.

Sales and Use Tax

Page 212


VENDING MACHINE SALES OF NONPROFIT OPERATORS



Authorization: California Revenue and Taxation CodeSection 6359.45(a).

(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program treats as consumers certainoperators of vending machines that dispenseitems selling for 15 cents or less. As such, thesales and use tax they are subject to is basedon the price they pay for the items sold ratherthan based on the sales price. In order to qual-ify for the program, an operator must be anonprofit, charitable, or educational organi-zation.

RATIONALE

This program provides tax relief to qualifyingvending machine operators and their custom-ers, to the extent that sales and use taxes lev-ied on the full retail price of dispensed items(versus their cost to operators) would ordi-narily increase their prices and reduce their

marketability. One rationale for the programis that the levying of sales and use taxes onindividual vending machine products is im-practical, since the exact amount of the taxcannot be conveniently incorporated into thecoinage charge. A second rationale is thatqualifying organizations provide sociallybeneficial services, and therefore, their fund-raising efforts and other activities are worthyof public financial support.

COMMENTS

The effect of this program is limited tononfood items. Food items sold in vendingmachines for no more than 15 cents (or 25cents for bulk products) are effectivelyexempt from taxation, regardless of whetherthe vendor is nonprofit or profitmaking.

Sales and Use Tax

Page 213


PHOTOCOPY SALES BY LIBRARIES


Tax Type: Sales and Use Tax

Authorization: California Revenue and Taxation CodeSection 6359.45 (b).

(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program defines certain libraries or theircontracted vendors as the consumers of pho-tocopies sold through coin-operated photo-copying machines. Consequently, librariespay sales tax on the purchase of the photo-copy machine and supplies, rather than onthe sales price of a photocopy. This has theeffect of partially exempting the retail valueof a photocopy from taxation. This programapplies to any library district, municipal li-brary, or county library. The photocopiesmust be sold from a coin-operated machinelocated at the library facility in order to qual-ify for the exemption.

RATIONALE

This program provides tax relief to qualifyinglibraries and their patrons by reducing thecosts of providing photocopying services. Theprogram has several rationales. One is thatthe levying of sales and use taxes on individ-ual machine-sold photocopies is impractical,since the exact amount of the tax cannot beconveniently incorporated into the coinagecharge. Another is that photocopy servicesserve a worthy public goal of enabling librarypatrons to make better use of library facilitiesand information.

Sales and Use Tax

Page 214


PRISONER-OF-WAR BRACELET SELLERS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program defines qualified sellers asconsumers of bracelets commemoratingAmerican prisoners of war, and thus basestheir taxation on the prices the sellers pay forthe bracelets rather than the sales price. Toqualify for the program, a seller must be anorganization which (1) is formed and oper-ated for a charitable purpose and (2) qualifiesfor the welfare (local property tax) exemp-tion. In addition, the organization's profitsmust be used exclusively to further the pur-poses for which it has been established.

RATIONALE

This program provides tax relief to qualifyingbracelet-distributing charitable organizationsand their patrons. It accomplishes this byreducing the costs or prices at which suchbracelets may be provided or sold, therebyincreasing the scope of their distribution. Theprogram's underlying rationale is that thedistribution of commemorative prisoner-of-war bracelets furthers the effort to locate andidentify prisoners of war.

COMMENTS

The California Department of Veterans Af-fairs indicates that, to its knowledge, only avery limited number of prisoner-of-warbracelets are currently being sold.

Sales and Use Tax

Page 215


VETERANS MEMORIAL LAPEL PINS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the sale,storage, or use of “Buddy Poppies” or any othersymbolic impermanent lapel pin that(1) memorializes military veterans killed inforeign wars and (2) is sold by veterans’ groups.

RATIONALE

This program provides an incentive for personsto support work done by veterans’ organiza-tions by providing tax relief for those who pur-chase lapel pins sold by these organizations.The Buddy Poppy program, for example, hasbeen used to raise funds to assist disabled veter-ans. The underlying rationale for this tax ex-emption program is the view that the purposesand activities of veterans’ organizations areworthy of public financial support.

Sales and Use Tax

Page 216


QUALIFIED SALES OF YOUTH GROUPS


Tax Type: Sales and Use Taxes.


(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program treats qualified youth grouporganizations as consumers of the food prod-ucts, nonalcoholic beverages, and certainother items that they sell. This has the effectof either fully exempting (in the case of mostfood products, which are not subject to thesales tax when purchased by these groups,but could be subject to sales tax when resoldby them) or partially exempting (for otheritems for which the sales tax on their pur-chase price is less than the sales tax on theresale price) the retail value of these productsfrom taxation. Nonfood items must be madeby members of the organization in order toreceive this treatment. In order to qualify forthe program, a group must (1) use its profitsexclusively to further its purpose(s), (2) con-duct sales only on an intermittent or irregularbasis, and (3) be included in one of the fol-lowing categories:

• Nonprofit groups that are nondis-criminatory and provide a program ofcompetitive sports or promote goodcitizenship.

• Groups sponsored or affiliated with aqualifying educational institution.

• Specific named groups, including theYoung Men’s Christian Association,

Boy Scouts, Girl Scouts, Bobby Sox,Future Farmers of America, and Vo-cational Industrial Clubs of America.

RATIONALE

This program provides tax relief to qualifyingyouth organizations and to individuals andbusinesses who purchase products they sell.It accomplishes this by reducing the costs andprices at which these products can be pro-vided and sold, thereby making them moremarketable and increasing their sales poten-tial. The program thus has the effect of givingincentives for such organizations to under-take fund-raising activities and for patrons tosupport them. The program's rationale is thatthe objectives and activities of the qualifyingorganizations are socially desirable and wor-thy of public financial support.

COMMENTS

Youth groups often operate food stands atsports events and fairs, or organize fundrais-ing meals, in order to support their activities.Many of these food sales would be taxable inthe absence of this program. This is becausethe food is sold in a hot, prepared form (suchas hamburgers or hotdogs), as a meal, or foronsite consumption at an event. Since thefood supplies purchased by these organiza-tions are not taxable under the general food

Sales and Use Tax

Page 217

exemption, this program results in a full ex-emption for their sales to consumers (withthe exception of carbonated beverages). Theprogram also applies to nonfood items thatare made by members of the organizationitself, in which case the group pays sales taxon the materials and supplies that it uses, butthe finished item is not taxable.

Chapter 116, Statutes of 1990 (AB 520, Klehs),eliminated a previous requirement that youthgroups that were not specifically named instatute were required to obtain prior ap-proval from the Board of Equalization inorder to qualify for this program.

Sales and Use Tax

Page 218


YEARBOOK AND CATALOG SALES BY STUDENT

ORGANIZATIONS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program defines qualified student orga-nizations as consumers of the yearbooks andcatalogues they distribute. Consequently, theorganizations pay sales tax on their purchaseprice of such items, rather than on the price atwhich they resell them. This has the effect ofpartially exempting from taxation the retailvalue of these items. The program applies toany public or private school, school district,county office of education, or student organi-zation.

RATIONALE

This program provides tax relief to studentorganizations and students, to the extent thatsales and use taxes on the full retail value(versus acquisition cost) of yearbooks andcatalogues ordinarily would increase theirprices. The rationale for the program is thatsuch catalogues and yearbooks are a funda-mental part of the schooling experience, andtherefore, the costs of such items should notbe increased by fully taxing such purchases.

Sales and Use Tax

Page 219


REPLACEMENTS FOR DESTROYED MUSEUM EXHIBITS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleor use of replacement exhibits for a qualifiedmuseum, or for a public art display of thestate or a local government. The programrequires that the property be acquired toreplace property physically destroyed by acalamity within three years after its occur-rence, and that it be purchased and usedexclusively for display purposes within themuseum.

To qualify, a museum must either (1) have asignificant portion of its space open to thepublic without charge, (2) be open to thepublic without charge for not less than sixhours per month during any month when themuseum is open to the public, or (3) be opento a segment of the student or adult popula-

tion without charge. In addition, the museummust be operated by or for a local or stategovernment entity, or by a qualified non-profit organization.

RATIONALE

This program provides tax relief to qualifiedmuseums after they have incurred damagefrom disasters, including fire, flooding, orearthquakes. The program's rationale is thatmuseums provide a valuable cultural andeducational service and, as such, they areworthy of public financial support.

COMMENTS

As described under a separate program, gen-erally, original artwork purchased by a mu-seum is exempt from taxation.

Sales and Use Tax

Page 220


SALES BY PTAS, CO-OP NURSERY SCHOOLS, AND

FRIENDS OF THE LIBRARY




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program treats as consumers nonprofitParent Teacher Associations (PTAs), Friendsof the Library (or equivalent organizations),and nonprofit parent cooperative nurseryschools. As consumers, such organizationspay taxes on the prices they pay rather thanon the prices they charge for items they sell toraise funds. This has the effect of partiallyexempting from taxation the retail value ofsuch items. The program requires that anyprofits derived from the sales of such prop-erty be used for furthering the purposes ofthe organization.

RATIONALE

This program provides tax relief to qualifyingorganizations and their patrons, to the extentthat taxation of the full retail price of theproperty these organizations sell would in-crease their prices and reduce their sales po-tential. The program thus provides an incen-tive for organizations to operate, andpatrons to support, qualifying activities. Theprogram's underlying rationale is that thegoals and activities of these organizations aresocially desirable, and thus worthy of publicfinancial support.

Sales and Use Tax

Page 221


RUMMAGE SALES BY QUALIFIED NONPROFIT

ORGANIZATIONS


Tax Type: Sales and Use Tax


(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program treats nonprofit organizationsthat perform auxiliary services to any city orcounty museum as the consumers of goodssold by those organizations at qualified rum-mage sales. As consumers, such organiza-tions pay tax on the price they pay rather thanon the price they charge for items they sell toraise funds. The effect of this is to limit theamount of sales and use taxes levied on suchproperty. In order for the program to apply,the property must be sold at an annual rum-mage sale which must have been held duringeach of the five consecutively precedingyears, and profits from the sale must be usedexclusively for furthering the purposes of theorganization.

RATIONALE

This program provides tax relief to qualifiedcharitable organizations and their patrons,and (indirectly) to the museums which theysupport. It does this to the extent that thepartial sales and use tax exemption on rum-mage sales stimulates such sales, and therebyincreases the amount of funds which charita-ble organizations and museums are able toraise from rummage sales. The program’srationale is that museum-related activities aresocially beneficial and deserving of publicfinancial support.

COMMENTS

This program results in a full tax exemptionfor donated items sold at these rummagesales.

Sales and Use Tax

Page 222


HANDCRAFTED ITEMS SOLD BY QUALIFIED

ORGANIZATIONS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program treats qualified organizationsas consumers of tangible personal property if:(1) such property is handcrafted and de-signed, created, or made by either individualswith developmental disabilities or childrenwith severe emotional disturbances who aremembers of or receive services from the orga-nization; (2) the price of such property doesnot exceed $20; (3) the organization’s salesare made on an intermittent basis; and (4) theprofits from sales are used exclusively forpromotion of the organization.

In order to qualify, an organization must: notdiscriminate on the basis of race, sex, nation-ality, or religion; have tax-exempt status asdefined under Section 501(c)3 of the InternalRevenue Code; and primarily provide ser-vices to either individuals with developmen-

tal disabilities or children with severe emo-tional disturbances.

RATIONALE

There exist several underlying rationales forthis program. One is to simplify tax adminis-tration in a manner similar to the exemptionfor occasional sales discussed elsewhere in thisreport. The program also provides tax relief tocharitable organizations and their clientele, tothe extent that it reduces the prices of itemsthey sell. The program provides an incentivefor individuals to purchase such items becauseof their reduced prices. To the extent that thelower prices increase sales, this provides addi-tional funds for services to individuals withcertain disabilities or emotional disturbances.This program is similar to the sales and use taxexemption provided for sales by qualifiedcharitable organizations.

Sales and Use Tax

Page 223


CHARITABLE ORGANIZATION SALES AND DONATIONS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

Commonly known as the “welfare exemp-tion,” this program exempts from taxation thesale or use of goods made, prepared, assem-bled, or manufactured by qualified charitableorganizations. In order for the program toapply, an organization must qualify for thewelfare (local property tax) exemption and beengaged in the relief of poverty and distress.In addition, the organization's sales and do-nations are exempt only if they are madeprincipally to assist purchasers or donees inpoverty or distress.

RATIONALE

This program provides tax relief to charitableorganizations and their clientele, to the extentthat it reduces the prices and costs of provid-ing property to disadvantaged persons. Theprogram also provides an incentive for indi-viduals to purchase merchandise sold bycharitable organizations. It does this by re-moving the sales tax on such merchandise,thereby reducing the prices at which the mer-chandise can be sold. To the extent that theorganization's sales are increased as a result,

the amount of funds available for the relief ofpoverty and distress is increased.

The program's underlying rationale is thatthe qualifying organizations provide a so-cially desirable service in making propertyavailable to distressed persons and, therefore,are deserving of public financial support.

COMMENTS

This program provides a tax exemption forsales in stores operated by Goodwill Indus-tries and similar organizations. In practice,the exemption applies to all sales in thesestores, and no attempt is made to determinewhether the purchaser is needy or not.

Donations were included in this program byChapter 1447, Statutes of 1989 (SB 874,Doolittle). This was done because previously,charities that purchased goods tax-free usingtheir resale permit found that they becameliable for tax when they donated these goods,because making a gift constituted a taxableuse of the property.

Sales and Use Tax

Page 224


PROPERTY LOANED TO EDUCATIONAL PROGRAMS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTIONThis program exempts from taxation the loanby retailers of certain tangible personal prop-erty to qualified educational institutions.

Specifically, the program exempts:

• Loans of tangible personal property toschool districts for educational programs.

• Loans of motor vehicles to the Univer-sity of California (UC) or the CaliforniaState University (CSU) system for ex-clusive use: (1) in an approved drivereducation teacher preparation certifica-tion program or (2) by an employee ofthe UC or CSU system, so long as theloan is approved by the President orChancellor of the university and theretailer is not guaranteed automotive-related business from the university.

• Loans of vehicles to an accreditedprivate or parochial secondary schoolfor exclusive use in an approveddriver education and training pro-gram.

• Loans of motor vehicles to a veterans'hospital or other nonprofit institution,to provide instruction in the opera-tion of specially equipped motor vehi-

cles to disabled veterans.Under existing law, if a retailer makes use ofproperty that is ostensibly held for sale, he orshe ordinarily must pay use tax on the whole-sale price of the property. Loans of suchproperty are considered “uses” of the prop-erty by the retailer and, therefore, are taxableunless otherwise exempted.

Example. In the absence of this program, anautomobile retailer who loans a vehicle at nocost to a high school driver training coursewould pay use tax on the dealership's cost ofthe vehicle. This is because most retailers areconsidered “consumers” of merchandise thatthey use themselves or loan to others. Thisprogram exempts from taxation such loans toqualifying educational institutions.

RATIONALEThis program provides tax relief to qualifiededucational institutions and the students whouse the qualified loaned property. It does thisto the extent that exemption of sales and usetaxes on such loans enables these educationalinstitutions to service more students becauseof reduced costs. In addition, students whopay fees for the affected programs may payless because of the reduced costs. The under-lying rationale for the program is that provid-ing equipment and vehicles to educationalinstitutions is a desirable social goal worthy

Sales and Use Tax

Page 225

of public financial support.

Sales and Use Tax

Page 226


NEW CLOTHING DONATED TO ELEMENTARY

SCHOOL CHILDREN




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from taxation the saleof children's new clothing when the clothesare sold to a qualified nonprofit organization.In order for the program to apply, the clothesmust be sold to a nonprofit organization or-ganized and operated for charitable pur-poses, possessing tax-exempt status and en-gaged in poverty and distress relief. Theclothes must be distributed, free of charge, toneedy elementary school children.

RATIONALE

This program provides tax relief to nonprofitorganizations which distribute free clothes tochildren. The underlying rationale for theprogram is that such tax relief increases theamount of clothing which nonprofit organi-zations may acquire with their available re-sources, and thereby enables them to better

meet the needs of the children they service.The program exists in recognition of the viewthat providing such clothes is a socially bene-ficial activity worthy of public financial sup-port.

COMMENTS

This program is similar to the general exemp-tion for sales and donations by charitableorganizations. However, it does differ inthree ways. First, the exemption applies topurchases by, rather than sales or use by, thecharity. Thus, it is useful to charities that donot have resale permits. Second, there is norequirement that the donating charity qualifyfor the welfare exemption under the localproperty tax. Third, there is no requirementthat the charitable organization prepare, as-semble, or make the donated items.

Sales and Use Tax

Page 227


FIRST $400 OF FOREIGN PURCHASES HAND-CARRIED

INTO CALIFORNIA


Tax Type: Use Tax.


(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from the use tax thefirst $400 of purchases made by state resi-dents in a foreign country and personallyhand-carried into California. Only one suchexemption can be claimed for any 30-dayperiod, and purchases sent or shipped intoCalifornia do not qualify for the exemption.

RATIONALE

This program provides tax relief to Californiaresidents returning from overseas with pur-chases that otherwise would be subject to theuse tax. The exemption originally was en-acted as part of a new state program whichseeks to collect use taxes on foreign pur-chases. Such taxes generally had not beencollected prior to 1990 due to administrativedifficulties.

The program is largely rationalized on ad-ministrative grounds. The exemption recog-nizes that the state's efforts to collect the usetax on foreign purchases is dependent on thefederal government's duty collection proce-dures. The U.S. Customs Service recently

began to provide the state with customs dec-larations filed by returning Californians. TheU.S. Customs Service does not require pay-ment of duties on the first $400 of foreignpurchases and keeps no useable records oftravelers entering the state with purchases ofless than $400. Consequently, the state has nocost-effective means at present to collect usetax from travelers declaring less than $400 offoreign purchases.

Although the state could attempt to collectthe use tax on the first $400 of purchasesbrought into the state by travelers who aresubject to customs duties, the administrativecosts would be prohibitive.

COMMENTS

The Board of Equalization started collectingcustoms declarations on October 1, 1990. Thisprogram, which was established by Chapter1533, Statutes of 1990 (SB 2455, Morgan),exempts $400 of the taxable purchases fromeach billing, for a maximum state revenueloss of $24 per billing.

Sales and Use Tax

Page 228


CHARITABLE DONATIONS MADE BY SELLERS


Tax Type: Use Tax.


(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program provides a use tax exemptionfor property donated by any seller to speci-fied educational institutions, charitable orga-nizations, and nonprofit museums located inCalifornia.

RATIONALE

This program provides tax relief to sellerswho donate property to educational andcharitable organizations and museums. Gen-erally, the purchase of goods solely for resaledoes not trigger the payment of sales or usetax on the purchase. Rather, tax is collectedonly on retail sales—that is, sales to someonewho will actually make final use of the goods.If, however, property originally bought forresale is instead used by the seller rather thanresold, the seller must pay use tax. This in-cludes donations of property, which are con-sidered a “use” of the property by the seller.This program exempts sellers from paying

use tax on items donated to qualifying orga-nizations. The program's intent is to giveadded incentive to donate property to non-profit organizations and museums, the ratio-nale being that such organizations serve apublic purpose and are deserving of publicfinancial support.

COMMENTS

This program was enacted by Chapter 905,Statutes of 1988 (SB 2508, McCorquodale),and originally applied only to personsengaged in retail sales activity who donatedproperty. The program was expanded byChapter 1387, Statutes of 1989 (SB 1226,Campbell), however, to include all sellers(including wholesalers). Chapter 1387 alsorestricted the program to donations usedexclusively for display in the case of non-profit museums, and required qualifyingmuseums to meet minimum standards forpublic access.

Sales and Use Tax

Page 229


AUCTIONS INVOLVING NONPROFIT ORGANIZATIONS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation thegross receipts from the sale, storage, use, orconsumption of tangible personal propertysold to a bidder at an auction conducted by,or affiliated with, a nonprofit organization.The purpose of the auction must be to obtainrevenue for the funding of a shelter for home-less individuals and families, and those reve-nues obtained must be expended for thatpurpose. The exemption does not apply tosales at an auction conducted more than onceevery 12 months.

RATIONALE

This program provides tax relief to charitableorganizations and their clientele by exempt-ing the sales and use tax on merchandise soldat auction. As a result, it increases the amountof funds available to charitable organizationsfor funding shelters for the homeless. Theprogram also eases the administrative burdensince the administrative costs associated withcollecting taxes from such infrequent salescould exceed the amount of taxes collected.

Sales and Use Tax

Page 230


SALES BY THRIFT STORES OPERATED

BY NONPROFIT ORGANIZATIONS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the sale,storage, consumption, or use of used cloth-ing, household goods, or other items sold bythrift stores operated by nonprofit organiza-tions. It has a sunset date of January 1, 2002.The thrift store involved must be operated forthe purpose of raising revenues for fundingmedical and social services for chronically illindividuals, with at least 75 percent of its netrevenues being expended for these purposes.

RATIONALE

This program provides tax relief to nonprofitorganizations (such as hospital auxiliaryorganizations) that raise revenues for thepurpose of funding medical and social ser-vices for the chronically ill. The program’sunderlying rationale is that the qualifyingorganizations are providing a socially desir-able service, and therefore deserve publicfinancial support.

Sales and Use Tax

Page 231


OPTION TO PAY TAX ON COST

RATHER THAN LEASE RECEIPTS


Tax Type: Use Tax.


(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program provides that owners of prop-erty engaged in the business of leasing suchproperty to others may choose to pay sales taxbased on the purchase price that they paid forthe property, rather than pay use tax on theirlease receipts. To qualify, property must beleased in substantially the same form as itwas acquired by the lessor. This programdoes not apply, however, to the rental ofvideo cassettes, which are taxed solely on thebasis of rental receipts under California Reve-nue and Taxation Code Section 6006 (g) (7).

RATIONALE

This program provides tax relief to lessors andlessees of qualified property. The rationaleunderlying the program is to facilitate the com-pliance of the lessor with the state sales tax codeand to simplify tax administration. The pro-gram accomplishes these ends by allowingbusinesses to pay the sales tax once, upon thepurchase of the item, rather than requiring the

lessor to pay the tax repeatedly based on theproperty's rental receipts.

COMMENTS

Under this program, a lessor can choose themost advantageous tax strategy for any specificsituation. The State Board of Equalization indi-cates that lease receipts are chosen as the basisof tax for about 75 percent of all leased prop-erty. This approach is preferred by car rentalcompanies, for example. Most rental cars areresold after a year or two, so that rental receiptsfor these cars are significantly less than theirpurchase price. Thus, paying tax on the rentalreceipts results in a smaller total tax liability forthe rental company than paying tax based onthe purchase price. Paying tax on lease or rentalreceipts also reduces the amount of capital re-quired for lessors to purchase property initially.In the case of property that is leased for its fulleconomic life, paying sales tax on the purchaseprice rather than on lease receipts generallywould result in a smaller tax liability.

Sales and Use Tax

Page 232


TAX LIABILITY ON “B AD DEBTS”




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts retailers from payingsales and use taxes due on accounts whichhave been determined to be uncollectible.

RATIONALE

This program provides tax relief to busi-nesses which have incurred financial lossesdue to their inability to collect money fromcustomers who have not paid their bills. Theunderlying rationale for the program is thatbusinesses, especially small firms, can sufferconsiderable hardships when they are unable

to collect money from customers who havepurchased goods using credit. Such financiallosses can impair a firm's ability to pay taxes,since the funds to pay these taxes normallyare collected from its customers.

COMMENTS

The above-cited rationale for this program isstrongest when retailers can show that theyhave executed proper caution when grantingcredit to consumers. In the absence of suchcare, however, the rationale loses strength.

Sales and Use Tax

Page 233


ACQUISITION SALE-LEASEBACK ARRANGEMENTS




(In Millions)

Fiscal Year Amount

1996-97 NA

1997-98 NA

1998-99 NA

DESCRIPTION

This program exempts from sales and usetaxation any transfer of the title to, or lease of,property under a qualifying “acquisitionsale-leaseback.” An acquisition sale-leasebackis a financing arrangement wherein the pur-chaser of property sells that property to athird party and then leases it back from thatthird party. These transactions generally are“on paper” only and do not involve anyphysical transfer of the property. In order toqualify for this program, an acquisitionsale-leaseback must be consummated within90 days of the first functional use of the prop-erty, and the sales or use tax must have beenpaid on the initial purchase of the property.

RATIONALE

This program reduces the cost of acquiringproperty financed through sale-leasebackarrangements. It does so by eliminating salestax on the sale to the lessor or, alternatively,the use tax on the lease payments to the les-

see. The rationale for the program is thatqualifying sale-leasebacks are financing ar-rangements similar to a mortgage. On thatbasis, it is argued that taxing thesale-leaseback transaction, in addition totaxing the initial purchase of the property,would amount to double taxation.

COMMENTS

Most sale-leaseback transactions probablywould be exempt from sales and use taxes,even in the absence of this program. This isbecause the courts have ruled (prior to theestablishment of this program) that notaxable sale occurs when the sole object of asale-leaseback is to obtain financing for thepurchase of equipment (Cedars-Sinai MedicalCenter v. State Board of Equalization, 162 Cal.App.3d.1182). This program was enacted byChapter 558, Statutes of 1990 (AB 3382,Baker), in part to simplify tax administrationby setting a specific 90-day window in whichsale-leasebacks must be completed in order tobe tax exempt.

Sales and Use Tax

Page 234


FACTORY-BUILT SCHOOL BUILDINGS




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation60 percent of the sales price of qualified fac-tory-built school buildings. Additionally, itspecifies that the place of sale is the retailer'splace of business, regardless of whether thesale includes installation or the building isplaced on a permanent foundation.

RATIONALE

The intent of this partial exemption is toequalize tax treatment of factory-built schoolbuildings with that of site-built buildings.Generally, the sales and use tax applies onlyto the building materials used to construct asite-built building, rather than to the fullprice of the completed building. It was deter-mined that approximately 40 percent of thesales price of a factory-built school buildingrepresents the value of the building materialsand, thus, the remaining 60 percent of theprice of such school buildings should be ex-empt from taxation.

This program is consistent with the60 percent exemption which also applies tofactory-built housing, described under a sep-arate program discussed earlier (see programentitled, "Factory-Built Housing").

COMMENTS

This program was enacted by Chapter 816,Statutes of 1989 (AB 1051, Leslie) and Chapter763, Statutes of 1990 (AB 4029, Leslie).

The Board of Equalization (BOE) adoptedregulations a few months prior to enactmentof this program which classified essentiallyall installations of modular buildings, includ-ing factory-built school buildings, as con-struction projects so that they would be taxedas if constructed on the site. Under that treat-ment, a purchaser, such as a school district,pays sales tax only on the value of fixturesand equipment supplied with the building.The manufacturer pays sales or use tax on thematerials used to make the building, but notax is applied to the value added by the man-ufacturer.

According to BOE, the total tax liability formanufactured buildings under this regulationis similar to the tax liability under this pro-gram (that is, about 40 percent of the totalvalue is taxed). Therefore, this program hasno significant impact on the amount of taxrevenue compared with the board's regula-tory interpretation of general sales and usetax law.

Sales and Use Tax

Page 235

Under the board's regulations, however, thelocal share of sales tax revenues would havebeen allocated to both the localities where themanufacturer's suppliers were located and tothe locality where the building was installed.

The main purpose of enacting this programwas to ensure that the city and county inwhich the building manufacturer is locatedcontinue to receive the local portion of thesales tax.

Sales and Use Tax

Page 236


ENDANGERED ANIMAL AND PLANT SPECIES




(In Millions)

Fiscal Year Amount

1996-97 Minor

1997-98 Minor

1998-99 Minor

DESCRIPTION

This program exempts from taxation the saleor use of endangered or threatened animal orplant species, provided that the buyer andseller are both nonprofit zoological societies.

RATIONALE

The intent of this program is to provide taxrelief for zoos that breed and exchange ani-mals and plants of endangered species (pri-marily animals). Some zoos specialize in thedevelopment and breeding of certain animalspecies. Prior to enactment of this program,

zoos had been assessed back taxes for makinganimal exchanges. The program's rationale isthat it is a worthy public goal to encouragezoos to breed and exchange endangered spe-cies.

COMMENTS

This program does not apply when zoologicalsocieties purchase animals or plants fromfor-profit sources. This program was estab-lished by Chapter 937, Statutes of 1989(AB 804, Peace).

Sales and Use Tax

Page 237


INVESTMENTS BY MANUFACTURERS




(In Millions)

Fiscal Year Amount

1996-97 $5

1997-98 6

1998-99 6

DESCRIPTIONThis program provides a partial exemptionfrom sales and use tax for manufacturing,research, and recycling property purchasedby “new businesses.” The exemption pro-vided under the program is equal to fivecents per dollar of the sales and use tax nor-mally owed, which represents the portion ofthe sales and use tax levied by the state forthe General Fund. (The taxpayer still has topay the additional statewide sales and use taxand any local sales and use taxes.)

To qualify, a business must have (1) com-menced business activities in California after1993, and (2) been in existence for fewer thanthree years. In addition, the business must beengaged in certain lines of business definedin the U.S. Standard Industrial ClassificationManual as "manufacturing" activities.

The program covers property costs that areconsidered "capital expenditures." (It alsoincludes the value of any capitalized laborcosts that are directly related to the construc-tion or modification of these expenditures.)Eligible property is depreciable property(such as machinery and computers) or com-puter software used primarily in(1) manufacturing, research, pollution con-trol, or recycling activities, or (2) maintaining,repairing, measuring, or testing property

used in such activities. In addition eligibleproperty includes, for certain activities, spe-cial purpose buildings and foundations thatare primarily used in connection with manu-facturing, refining, processing, fabricating, orresearch and storage.

A taxpayer may claim a tax refund under thisprogram if sales and use taxes were paid onqualified costs and if the taxpayer was eligi-ble for this exemption, but did not claim it.The program sunsets January 1, 2001, or ear-lier under certain conditions.

RATIONALEThis program provides an incentive for quali-fied taxpayers to expand manufacturing andresearch property in California. It does thisby offsetting a portion of the costs incurredthrough a partial sales and use tax exemp-tion. It provides tax relief to new businessesthat may not be able to claim the Manufac-turer’s Investment Income Tax Credit (whichis available to all businesses) because they donot have positive tax liabilities (which is com-mon among new businesses with large start-up expenses, and thus, similarly large taxdeductions for business expenses and losses).Thus, this program tries to equalize tax treat-ment between new businesses and well estab-lished businesses that may be able to readilyclaim the income tax credit.

Sales and Use Tax

Page 238

COMMENTSTo the extent that this program reduces thecost of capital acquisition to businesses, itresults in an unknown expansion in businessactivity. Also, refer to comments under the

PIT and BCT income tax program entitled"Manufacturer’s Investment Tax Credit."

Pursuant to Chapter 323, Statutes of 1998(AB 2798, Machado) this program was ex-panded to include teleproduction and post-production equipment.

Sales and Use Tax

Page 239

Date post:	25-Apr-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Sales and Use Tax - California Legislative Analyst's Office · Sales and Use Tax—Overview Page...

Documents