• Alcohol Used in Trades, Professions, and Industries
• Beer Consumed by Brewers' Employees
• Distilled Spirits Used in the Manufacture of Food Products
• Distilled Spirits Used for Research And Medical-Related Purposes
• Distributions of Tobacco Products to U.S. Armed Forces And the U.S. Department of Veterans' Affairs
• Distributions of Tobacco Products To Veterans' Institutions
• Small Shipments of Cigarettes Transported Into California
• Natural Gasoline
• Ship or Aircraft Fuel Ultimately Distributed to the U.S. Armed Forces
• Fuel for Off-Highway Vehicle Operations
• Fuel Sales to Consulate Officers And Employees
• Fuel for Race Cars

Alcohol Used in Trades, Professions, and Industries

Description

This program exempts from the alcoholic beverage tax the sale of alcohol, distilled spirits, or wine used in trades, professions, or industry applications. Such uses typically include cases where alcohol is used as part of a production or treatment process of some sort, such as in pickling processes or the production of gasohol. To qualify, the sale must be made by a licensed distilled spirit manufacturer, brandy manufacturer, rectifier, industrial alcohol dealer, or wine grape grower.

Rationale

This program provides tax relief to the purchasers of exempted items, to the extent that excise taxes levied on them ordinarily would be incorporated into the price of the product. The underlying rationale for the program is the view that the alcoholic beverage tax is intended to be a tax on alcohol only when it is consumed as a beverage, and that other uses of alcohol should not generally be subject to the tax.

Beer Consumed by Brewers' Employees

Description

This program exempts from the alcoholic beverage tax the consumption of beer, when the beer is (1) consumed by the employees of a brewer, and (2) consumed on the premises of the brewer.

Rationale

This program provides tax relief to brewers by relieving them of paying taxes on the beer which their employees consume in-house. The underlying rationale for the program appears related to the administrative problems involved with documenting and measuring the volume of in-house beer consumption.

Comments

The Board of Equalization's Regulation 2551 limits the amount of this exemption to the maximum amount allowed by federal alcoholic beverage tax regulations.

Distilled Spirits Used in the Manufacture of Food Products

Description

This program effectively exempts from alcoholic beverage taxation the sale of distilled spirits that are used in the manufacture of food products. Mechanically, it accomplishes this by providing a tax credit equal to the amount of any alcoholic beverage excise taxes paid.

Rationale

This program provides tax relief to producers and consumers of food products that incorporate the use of distilled spirits in the manufacturing process. In the absence of the program, excise taxes levied on such distilled spirits ordinarily would be incorporated into the prices of the food products themselves. The underlying rationale for the program is the view that the alcoholic beverage tax is intended to be a tax on alcohol only when it is consumed as a beverage, and that other uses of alcohol should not generally be subject to the tax.

Comments

Some foods use brandy, rum, or other distilled spirits as a flavoring, and little or no alcohol remains in the food after baking or other processing activities. Alcohol also is used as the base for a variety of flavoring extracts. This program specifies that the manufacturer's use of alcohol in food must conform to certain federal regulations.

The tax credit mechanism is used as the means for providing the exemption, as opposed to an outright direct exemption per se, due to its relative administrative simplicity.

Distilled Spirits Used for Research And Medical-Related Purposes

Description

This program exempts from the alcoholic beverage tax the sale of (1) ethyl alcohol used for scientific research or by any hospital or sanitarium, and (2) alcohol used in medicinal, pharmaceutical, antiseptic, or selected other products. To qualify, packages of distilled spirits must be sold in amounts greater than one gallon.

Rationale

This program provides tax relief to the users of alcohol for the above-exempted purposes, including the consumers of products made with such alcohol, by reducing the prices of such products. The underlying rationale for the program is the view that the alcoholic beverage tax is intended to be a tax on alcohol only when it is consumed as a beverage, and that other uses of alcohol should not be subject to the tax. This program also can be rationalized on the grounds that the exempted uses of alcohol are for socially beneficial purposes, and, therefore, their cost should not be increased by taxation.

Distributions of Tobacco Products to U.S. Armed Forces And the U.S. Department of Veterans' Affairs

Description

This program exempts from the cigarette and tobacco tax the distribution of cigarettes and tobacco products to the U.S. Armed Forces and to the U.S. Department of Veterans' Affairs.

Rationale

This program provides a tax incentive for the U.S. Armed Forces and the U.S. Department of Veterans' Affairs to purchase cigarettes or tobacco products in California, as opposed to outside of California. It does this to the extent that the tax, if imposed, would make California cigarette and tobacco product prices sufficiently high to cause these entities to purchase cigarettes outside of California. This, in turn, would reduce economic activity in California related to the distribution and retailing of these products.

The program also has been rationalized on the grounds that it grants tax relief to various members of the U.S. Armed Forces and patrons of the U.S. Department of Veterans' Affairs, by enabling them to acquire their cigarettes and tobacco products at reduced costs. It has been argued that such persons are deserving of this public subsidy because of their present or past service to their country.

Comments

The U.S. Armed Forces and U.S. Department of Veterans' Affairs are such large purchasers of cigarettes that they can cost-effectively purchase cigarettes and tobacco products in a low-cost state for subsequent sale in a higher-cost state, provided that the interstate price differential exceeds the interstate shipment costs.

The courts have held that this program applies to cigarette and tobacco product sales through military commissaries and exchanges, but not sales to U.S. officers' clubs and officers' messes.

The estimated revenue reduction shown above is based on data from the Board of Equalization (BOE). The estimate includes expenditures under the other cigarette tax expenditure programs discussed herein, such as distributions to veterans' institutions and small cigarette and tobacco product shipments. This is because data on these transaction types are not reported separately to the BOE. According to estimates, however, sales to the military comprise the majority of all exempt cigarette sales.

The tobacco industry benefits from this program to the extent that the program increases demand for tobacco products.

Distributions of Tobacco Products To Veterans' Institutions

Description

This program exempts the sale or gift of federally tax-free cigarettes or other tobacco products, when delivered directly from the manufacturer to either a veterans' home located in California, or a hospital or domiciliary facility of the U.S. Department of Veterans' Affairs. To qualify for the program, the cigarettes and tobacco products must be issued free of charge to veterans receiving hospitalization or domiciliary care.

Rationale

This program provides a tax incentive for qualified institutions to provide cigarettes and other tobacco products to their patrons. The underlying rationale for the program is that the provision of free cigarettes and other tobacco products to hospitalized veterans is deserving of public financial support, due to the military services that these individuals have provided to their country.

Comments

As with other exemptions for tobacco products, the tobacco industry benefits from this program to the extent that the program increases demand for tobacco products.

The revenue reduction associated with this program is incorporated within the revenue reduction shown for the immediately preceding program entitled, "Distributions of Tobacco Products to U.S. Armed Forces and the U.S. Department of Veterans' Affairs."

Small Shipments of Cigarettes Transported Into California

Description

This program exempts from the cigarette tax the distribution of cigarettes transported into California from out of state, provided that the total shipment does not exceed 400 cigarettes. The program requires that the cigarettes either be (1) intended for consumption by the individual bringing them into the state, or (2) obtained at one time or another from the U.S. Department of Veterans' Affairs, or exchanges or commissaries of branches of the U.S. Armed Forces.

Rationale

This program provides tax relief to consumers of qualifying small-shipment cigarettes. The program's rationale is that the revenues derived from taxing these small shipments are insufficient to justify incurring the administrative costs of collecting the tax.

Comments

There is no similar exemption for other tobacco products. However, Revenue and Taxation Code Sections 30431 and 30432 implicitly allow transportation of individual quantities of other tobacco products valued at $25 or less and on which tax has not been paid, without a transporter's permit or invoices.

The revenue reduction associated with this program is incorporated within the revenue reduction shown for the prior program, "Distributions of Tobacco Products to U.S. Armed Forces and the U.S. Department of Veterans' Affairs."

Natural Gasoline

Description

This program exempts from the motor vehicle fuel tax the distribution of natural gasoline to a duly licensed distributor.

"Natural gasoline" is not the same as the gasoline that is commonly sold for use in automobiles. Rather, it is a naturally occurring liquid which often is present in crude oil. Generally, natural gasoline cannot be used directly in automobiles. However, natural gasoline may be blended with crude oil distillates during the production of motor vehicle fuel. In this case, the natural gasoline becomes indirectly taxed as a component part of the motor fuel at the retail level. The program therefore, exempts from taxation natural gasoline not used in motor vehicles.

Rationale

This program provides tax relief to producers and users of natural gasoline, to the extent that excise taxes levied on such gasoline ordinarily would be incorporated into its production costs and sales price. The program's rationale is that unblended natural gasoline generally cannot be used in vehicles which use the public highways that are supported by the proceeds of the motor vehicle fuel tax.

Ship or Aircraft Fuel Ultimately Distributed to the U.S. Armed Forces

Description

This program exempts from the motor vehicle fuel tax the qualified distribution of motor fuel to the armed forces. To qualify for this program, the fuel must be (1) used in a ship or aircraft, or (2) used outside of California. The program includes motor fuel that is distributed to a third party prior to its distribution to the armed forces.

Rationale

The basic rationale for this program is that revenues from the motor vehicle fuel tax are directed toward the maintenance of public highways and airports, and these transportation facilities are not used by the vehicles whose fuel use is exempted from taxation under this program. It also has been suggested that the program may increase the purchase of military fuel in California, at least in some circumstances, by reducing its price relative to prices charged in other states.

Fuel for Off-Highway Vehicle Operations

Description

This program exempts from the motor vehicle fuel tax any motor fuel used for purposes other than operating motor vehicles on public streets and highways.

The program operates via a refund mechanism, whereby the fuel is taxed when purchased and then the purchaser must apply for a refund for qualifying off-road fuel use. Fuel uses that qualify for refunds include use in farm tractors and irrigation pumps, electric generators, and vehicles operated solely on private property (such as within an amusement park). Fuel used by off-road recreational vehicles that are licensed for use on public lands and motor vehicle fuel used in boats are not eligible for this program. Fuel used in construction equipment is addressed in a separate exemption.

Rationale

This program provides tax relief to fuel consumers who are not using the fuel to operate vehicles on public streets and highways. The underlying rationale for the program is that the proceeds of the motor vehicle fuel tax are used generally for the construction and maintenance of public streets and highways.

The rationale for not exempting fuel used by off-road recreational vehicles licensed for use on public lands is that the estimated amount of revenues collected on that fuel is allocated to special funds that support off-highway recreational activities. Likewise, the estimated amount of tax paid on motor vehicle fuel used in boats is transferred annually to the Harbors and Watercraft Revolving Fund for the support of various boating programs.

Comments

There are many minor fuel uses that qualify for a tax refund but for which refunds are not requested. Fuel used in home lawnmowers is one example.

Fuel Sales to Consulate Officers And Employees

Description

This program exempts from the motor vehicle fuel tax fuel sold to an officer or employee of a foreign consulate, providing specified conditions are met. In order to qualify, the program requires that the sale must be charged to a credit card held by the consulate and certified by the U.S. State Department, and that the fuel must be used in a consular vehicle registered with the State Department. Furthermore, the program only applies to consulates of foreign governments that are exempt from taxes by treaty, or who provide a similar tax exemption to U.S. diplomats on a reciprocal basis. The consulate employee may not use the fuel in connection with a private occupation or for personal gain within the state.

Rationale

This program provides tax relief to foreign governments. According to the Board of Equalization, this program helps fulfill the terms of treaties and reciprocal arrangements between the U.S. and countries with consulate employees stationed in the U.S. Under the terms of such treaties and arrangements, U.S. consulate employees are not subject to tax on fuel consumed in foreign countries, and foreign consulate employees are not subject to taxes on fuel consumed in the U.S.

Fuel for Race Cars

Description

This program exempts from fuel taxation inflammable liquids that are specifically manufactured for racing motor vehicles, and that are distributed and used for racing motor vehicles at a racetrack. In the absence of this exemption, distributors of fuel manufactured specifically for race cars would be required to collect the tax from fuel purchasers. Under this program, distributors are exempted from collecting the tax.

Although this type of program mechanism does not ultimately affect vehicle-related fuel tax revenues, it does result in reduced sales tax revenues. This is because the sales tax is imposed on the entire price of the fuel, which ordinarily would include the motor vehicle fuel tax.

Rationale

This program provides tax relief to race car owners and operators by reducing the fuel tax they pay on fuel used in operating racing vehicles. The rationale for the exemption from the motor vehicle fuel tax is that such vehicles are operated off-road, and hence do not benefit from the street and highway improvements funded by the tax.

Comments

Other operators of vehicles that are not used on public highways must pay the motor vehicle fuel tax, and then apply for a refund of the tax (if they qualify). California Revenue and Taxation Code Section 7304 applies to the exemption under the motor vehicle fuel tax. The exemption under Section 8604 is a parallel exemption under the use fuel tax.