Sales and use taxes in California

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Sales and use taxes in California are among the highest in the United States and are imposed by the state and by local governments. Sales taxes are very regressive. Poor families pay almost eight times more of their incomes in sales taxes than the best-off families.[1] Local sales tax increases also create geographical variations in sales tax rates which can place local businesses at a competitive disadvantage.[2]

Sales Tax Rates[edit]

At 7.50%, California has the highest minimum state sales tax in the United States, which can total up to 10.00% with local sales taxes included.[3]

Some claim the high tax rates partially compensate for the reduced property tax revenue resulting from Proposition 13 which California voters approved in June 1978. However, others point out that, in most counties (all but the rural counties), property tax revenues today are higher than the year before Proposition 13 passed, even after adjusting for inflation and population growth. Sales and use taxes in California are collected by the publicly elected Board of Equalization, whereas income and franchise taxes are collected by the Franchise Tax Board. The statewide base sales tax rate of 7.50% is allocated as follows:[4]

  • 7.50% – State + Local
    • 6.25% – State
      • 3.9375% – State – General Fund
      • 0.50% – State – Local Public Safety Fund
      • 0.25% – State – Education Protection Account (Prop. 30 – Expires 12/31/2016)
      • 0.25% – State – Local Revenue Fund for local health and social services
      • 1.0625% – State – Local Revenue Fund 2011
    • 1.25% – Uniform Local Tax
      • 0.25% – Local County – Transportation funds
      • 1.00% – Local City/County – Operational funds

Supplementary Local Sales Taxes[edit]

Supplementary local sales taxes may be added by cities, counties, service authorities, and various special districts (such as the Bay Area Rapid Transit district). Local county sales taxes for transportation purposes are particularly popular in California. Additional local sales taxes levied by counties and municipalities are formally called "District Taxes". The effect is that sales tax rates vary in California from 7.50% (in areas where no additional local sales taxes are levied) to 10.00%.[5] For example, Sacramento, the state capitol, has a combined 8.50% sales tax rate, and Los Angeles, the largest city in California, has a combined 9.00% sales tax rate.[3]

SB 566 (2003) and the Rise in Local Sales Tax Increases[edit]

The number of local sales taxes greatly increased following the passage of SB 566 in 2003.[6][7] SB 566 legally authorized all California cities to levy additional local sales taxes. SB 566 also increased the maximum combined local sales tax rate that can be levied by local governments.[8] As of October 2016, more than 140 California cities have approved local sales tax increases. Not only has the number of local city sales tax increases exploded since the passage of SB 566, but the magnitude of the sales tax increases (as measured by the sales tax rate increase) has also significantly increased as more cities are seeking larger sales tax rate increases.[9]

The SB 566 language authorizing cities to levy local sales taxes was inserted near the end of the legislative session without the usual public scrutiny, was approved by a politically partisan vote, and was signed into law by former California Governor Gray Davis after the election in which he was recalled from office.[10]

Local Sales Taxes Subject to Voter Approval Under Proposition 218[edit]

All local sales taxes are subject to voter approval under Proposition 218 ("Right to Vote on Taxes Act") which California voters approved in November 1996.[11] Whether simple majority voter approval or two-thirds voter approval is required depends upon the type of sales tax levied and the type of local government imposing the sales tax.

Unrestricted general sales taxes are subject to majority vote approval by local voters.[12] General sales taxes can be spent by local politicians for any general governmental purpose, including public employee salaries and benefits. General sales tax spending decisions are made after the tax election by local politicians as part of the regular annual local government budget process. Some local governments may engage in general sales tax abuses in an effort to evade the two-thirds vote requirement applicable to special sales taxes.

Special sales taxes dedicated for one or more specific purposes are subject to two-thirds vote approval by local voters.[13] Any sales tax imposed by a local government other than a city or a county (e.g., a special district such as a local transportation agency) must be a special tax subject to two-thirds vote approval by local voters.[14]

Proposition 218 does not legally authorize any local government to levy a sales tax.[15] The legal authority to levy a local sales tax must come from a state statute. A two-thirds vote of all members of the legislative body of the local government is usually required before a local sales tax measure may be presented to voters at an election.[16]

Sales Tax Taxpayer Tool[edit]

As part of its Taxpayer Tools publication series,[17] the Howard Jarvis Taxpayers Association has released a publication to assist voters and taxpayers regarding local sales tax measures placed on the ballot by a local government in California.[18]

Relationship Between Sales Tax Increases And Public Employee Costs[edit]

The driving force behind many local sales tax increases is skyrocketing public pension costs and public employee retiree healthcare.[19] Research has shown that local sales tax increases are concentrated in California localities that have the largest pension problems.[20]

In an effort to increase the chances of passing a local sales tax, some local governments play budgetary games in which they place a sales tax measure on the ballot to help fund a politically popular service (e.g., public safety), and if the sales tax passes, it enables the local government to free up other taxpayer funds that can then be spent on less politically popular items such as high public employee salaries and benefits.[21]

County Transportation Sales Taxes[edit]

Countywide sales taxes for transportation purposes are very popular in California. However, transportation sales taxes are regressive and also shift the financial base of transportation systems from user fees to taxes paid by all taxpayers without regard to direct reliance on those transportation systems.[22] County transportation sales taxes are typically supported (including with significant campaign contributions) by groups that disproportionately benefit from the tax, including the local business community, the construction industry, real estate developers, and employee unions.[23] Some counties have passed multiple transportation sales taxes increases such as Los Angeles County that has passed three transportation sales tax increases for a combined rate of 1.5%.[24] County transportation sales taxes generally do not include traffic performance standards that actually require improved traffic conditions.

Local Government Data in Sales Tax Elections[edit]

It is often helpful for voters to have financial data about a local government proposing a sales tax so that voters can make more informed voting decisions regarding the merits and need for the sales tax. Much of the financial data about a local government can be obtained directly from the local government itself. Additional information that can be of value to voters includes public employee salary and benefits data (especially pension data), and annual budgetary and financial reports. Local government budgetary spending priorities, as reflected by recent budgetary data, can be especially helpful in general sales tax elections where local politicians decide how to spend the sales tax proceeds.

Extensive public data sources outside of a local government are also available to voters in connection with local sales tax elections.

Important Issues Related to Local Sales Tax Elections[edit]

Local government issues related to sales tax elections (e.g., local government “informational” campaigns and impartial ballot questions) can impact the integrity and fairness of the election process. Voter/taxpayer issues related to local sales tax elections (e.g., cumulative tax burden and precedent) can impact the individual voter decision-making process as well as election outcomes. Support and opposition campaigns in local sales tax elections can also impact election outcomes.

Cities With Highest Combined Sales Tax Rates[edit]

As of October 1, 2016, the following California cities have the highest combined sales tax rate of 10.000%:[3]

CITY TAX RATE COUNTY
Albany 10.000% Alameda
Compton 10.000% Los Angeles
El Cerrito 10.000% Contra Costa
Hayward 10.000% Alameda
La Mirada 10.000% Los Angeles
Pico Rivera 10.000% Los Angeles
San Leandro 10.000% Alameda
South Gate 10.000% Los Angeles
Union City 10.000% Alameda

Local Sales Tax Reduction or Repeal Using Proposition 218[edit]

Proposition 218 (“Right to Vote on Taxes Act”) was a 1996 initiative constitutional amendment approved by California voters. Proposition 218 includes a provision constitutionally reserving to local voters the right to use the initiative power to reduce or repeal any local tax, assessment, fee or charge, including provision for a significantly reduced petition signature requirement to qualify a measure on the ballot.[25] A local sales tax, including a sales tax previously approved by local voters, is generally subject to reduction or repeal using the local initiative power under Proposition 218.

Examples where the reduction or repeal of a local sales tax may be appropriate include where there has been significant waste or mismanagement of sales tax proceeds by a local government, when there has been controversial or questionable spending of sales tax proceeds by a local government (particularly where sales tax proceeds are used to pay for excessive public employee salaries and/or benefits such as pensions), when the quality of the programs and services being financed from sales tax proceeds is not at a high level expected by voters, when the local sales tax rate is excessive or unreasonably high (particularly in situations where a significant local sales tax increase was narrowly approved by the voters), or when promises previously made by local politicians about the spending of local sales tax proceeds are broken after voter approval of the sales tax (particularly in situations where local politicians made legally nonbinding promises concerning the spending of general sales tax proceeds that are not legally restricted for specific purposes).

A local sales tax used to repay bonds is a legally more complex situation because federal contract impairment issues may preclude the exercise of the local initiative power under Proposition 218. Local voter-approved transportation sales taxes often include at least a portion of the tax proceeds to repay bonds. Advice from legal counsel is generally needed in situations where bonds have been issued and sales tax revenues have been pledged to repay the bonds. A local compensatory initiative under Proposition 218 is an alternative option when contract impairment problems are present.

Recent Statewide Sales Tax Increases[edit]

Recent temporary statewide sales tax increases include:

  • From April 1, 2009 until June 30, 2011, the state sales and use tax increased by 1% from 7.25% to 8.25% as a result of the 2008-2009 California budget crisis.[26][27]
  • Effective January 1, 2013, the state sales and use tax increased by 0.25% from 7.25% to 7.50% as a result of Proposition 30 passed by California voters in the November 6, 2012 election. The change is a four-year temporary tax increase and is scheduled to end on December 31, 2016.[28]

Sales Tax Rate Updates[edit]

Official sales tax rate updates are regularly published on the State Board of Equalization website and also in Publication 71.[29][30]

Taxation of online sales[edit]

As of July 1, 2011, California applies sales tax to online retailer purchases. It is the retailer's responsibility to collect the state sales tax on all purchases made within (or shipped to) California regardless where the retailer/supplier is located. This sales tax levy was arranged through a negotiation between the governor, Jerry Brown, and the large online retailers such as Amazon. It is commonly referred to as "the Amazon deal." Before this deal Amazon, and others, remained physically outside of the state (nexus law) to get around the sales tax laws as they were written and interpreted before the deal was brokered, whereas now Amazon and others have many warehouse, office, and research locations within the state of California, thus contributing to the California economy as a whole.

Previously Assemblywoman Nancy Skinner of Berkeley twice introduced legislation to apply sales tax to online retailers such as Amazon.com only to have the bills be vetoed by the governor. On 19 January 2011 Skinner introduced similar legislation in the form of AB153. Because of political wrangling this bill never made it to law but the above "deal" was brokered by the governor. This bill would have required out-of-state online sellers with affiliates in California to collect sales tax on purchases made by state residents. The affiliate provision was included to ensure that only sellers with a California nexus are taxed, as required by federal law and the U.S. Supreme Court's ruling in Quill Corp. v. North Dakota.

Exemptions[edit]

In general, sales tax is required on all purchases of tangible personal property to its ultimate consumer. Services are not subject to sales tax (but may be subject to other taxes), although some politicians want to extend the sales tax to services. Liability for sales tax attaches to the seller, not the buyer; but the seller is allowed by law to collect the tax from the buyer (and if the seller does so, the buyer is obligated[citation needed] to pay it).

Vehicle purchases are taxed based on the city and county in which the purchaser registers the vehicle, and not on the county in which the vehicle is purchased. There is therefore no advantage in purchasing a car in a cheaper county to save on sales tax (a one-percent difference in sales tax rate would otherwise result in an additional $300 loss on a $30,000 car).[citation needed]

In grocery stores, unprepared food items are not taxed but vitamins and all other items are. Ready-to-eat hot foods, whether sold by supermarkets or other vendors, are taxed. Restaurant bills are taxed. As an exception, hot beverages and bakery items are tax-exempt if and only if they are for take-out and are not sold with any other hot food. If consumed on the seller's premises, such items are taxed like restaurant meals. All other food is exempt from sales tax.

Also excluded are food animals (livestock), food plants and seeds, fertilizer used to grow food, prescription drugs and certain medical supplies, energy utilities, certain alternative energy devices and supplies, art for display by public agencies, and veterans' pins. There are many specific exemptions for various veterans', non-profit, educational, religious, and youth organizations. Sale of items to certain out-of-state or national entities (mostly transportation companies) is exempt, as are some goods sold while in transit through California to a foreign destination.

Occasional or one-time sales not part of a regular business are exempt, except that sales of three or more non-food animals (puppies, kittens, etc.) per year are taxed.[31]

There are also exemptions for numerous specific products, from telephone lines and poles, to liquid petroleum gas for farm machinery, to coins, to public transit vehicles. There are partial exemptions for such varied items as racehorse breeding stock, teleproduction service equipment, farm machinery, and timber-harvesting equipment.[32] For an organized list of exemptions, with estimates for how much revenue the state loses and the people saves for each, see Publication 61 of the Board of Equalization.[33]

Sales tax is charged on gasoline. The tax is levied on both the gasoline and on the federal and state excise taxes, resulting in a form of "double taxation". The sales tax is included in the metered price at the pump. The California excise tax on gasoline as of mid-2011 is 35.7 cents per gallon for motor fuel plus a 2.25% sales and use tax, 13 cents per gallon for diesel plus a 9.12% sales and use tax.[34]

Motor vehicle gasoline and jet fuel are subject to special taxation regimes. In 2005, there was a political dispute in the San Francisco Bay Area about whether revenues for jet fuel should be credited to San Mateo County (where San Francisco International Airport appears to be physically located), the City and County of San Francisco (where the airport is legally located, because it is owned by the City-County), or Alameda County, where Oakland International Airport is located. (The distinction is largely point of sale delivery vs. point of negotiation for the sale.) This is controlled by Regulation 1802,[35] which has other provisions about businesses which have multiple locations.

The California Board of Equalization provides an online list of sales taxes in the communities of the state.

Debate[edit]

Critics of the current California sales tax regime charge that it gives local governments an incentive to promote commercial development (through zoning and other regulations – otherwise known as fiscalization of land use) over residential development, including the use of eminent domain condemnation proceedings to transfer real estate to higher sales tax generating businesses.[36]

See also[edit]

References[edit]

  1. ^ Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (5th ed.). Institute on Taxation & Economic Policy. January 2015. p. 6. 
  2. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. July 2004. p. 3. 
  3. ^ a b c Equalization California Board of (October 2016). "Publication 71, California City and County Sales and Use Tax Rates, October 1, 2016 Edition" (PDF). 
  4. ^ California Board of Equalization - Detailed Description of the Sales and Use Tax Rate
  5. ^ California Board of Equalization October 1, 2016, California City & County Sales & Use Tax Rates
  6. ^ "The Rise of Local Add-On Sales Taxes in California". CaliforniaCityFinance.com. July 2016. p. 4. 
  7. ^ Stats. 2003, ch. 709.
  8. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. July 2004. p. 4. 
  9. ^ "The Rise of Local Add-On Sales Taxes in California". CaliforniaCityFinance.com. July 2016. pp. 1–2. 
  10. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. July 2004. p. 4. 
  11. ^ Cal. Const., art. XIII C, § 2.
  12. ^ Cal. Const., art. XIII C, § 2, subd. (b).
  13. ^ Cal. Const., art. XIII C, § 2, subd. (d).
  14. ^ Cal. Const., art. XIII C, § 2, subds. (a) & (d).
  15. ^ Cal. Const., art. XIII D, § 1, subd. (a).
  16. ^ Cal. Rev. & Tax. Code, §§ 7285.9, 7285.91 [cities]; Cal. Rev. & Tax. Code, §§ 7285, 7285.5 [counties].
  17. ^ "Taxpayer Tools". Howard Jarvis Taxpayers Association. 
  18. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. 
  19. ^ "Local Tax and Bond Measures in California November 2016 – A State Preview". CaliforniaCityFinance.com. September 2016. p. 3. 
  20. ^ Kersten, David (October 4, 2016). ""Unsustainable" Pension Costs Are The Driving Force Behind Local Tax Increases". Fox&Hounds Daily. 
  21. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. July 2004. p. 3. 
  22. ^ Wachs, Martin (Spring 2003). "Local Option Transportation Taxes: Devolution as Revolution". Access: 15. 
  23. ^ "How to Defeat Local Sales Taxes". Howard Jarvis Taxpayers Association. July 2004. p. 4. 
  24. ^ "Local Countywide Transportation Sales Taxes". CaliforniaCityFinance.com. September 2010. p. 1. 
  25. ^ Cal. Const., art. XIII C, § 3.
  26. ^ California Legislature Passes Tax Plan, Ends Impasse
  27. ^ "California Statewide Sales and Use Tax Rate to Decrease by 1% on July 1, 2011" (PDF). California State Board of Equalization. Retrieved March 8, 2013. 
  28. ^ "TEXT OF PROPOSED LAWS: Proposition 30" (PDF). California Secretary of State. 
  29. ^ California Board of Equalization
  30. ^ California Publication 71
  31. ^ http://www.boe.ca.gov/pdf/pub122.pdf
  32. ^ New Sales and Use Tax Exemptions
  33. ^ California Publication 61
  34. ^ California Board of Equalization Online Tax Rates
  35. ^ http://www.boe.ca.gov/pdf/reg1802.pdf Archived November 3, 2010, at the Wayback Machine.
  36. ^ "City Competition for Sales Taxes: Symptom of a Larger Problem?". Research Brief. Public Policy Institute of California. July 1999.