California's
Tax Expenditure Programs

Sales and Use Tax Programs--Part 4

Contents

• Health Care Professionals Treated as Consumers
• Veterinarians Treated as Consumers
• Aircraft for Common Carriers or for Use by Foreign Governments or Nonresidents
• Trailers And Semitrailers Moved to Place of Sale
• Qualified Watercraft and Their Component Parts
• Vehicles, Vessels, and Aircraft Transferred Within a Family
• New Vehicles Sold to Foreign Residents For Foreign Shipment
• Occasional Sales
• Occasional Sales of Vehicles, Vessels, or Aircraft
• Occasional Sales of Other Products by Hay Producers
• Membership Fees Charged by Consumer Cooperatives
• Clothing Alterations by Clothes Cleaning and Dyeing Businesses
• Flags Sold By Veterans' Groups
• Vending Machine Sales of Nonprofit Operators
• Photocopy Sales By Libraries
• Prisoner-of-War Bracelet Sellers
• Veterans Memorial Lapel Pins
• Qualified Sales of Youth Groups
• Yearbook and Catalog Sales by Student Organizations

Exclusion/Exemption:

Health Care Professionals Treated as Consumers

Description

This program provides a partial tax exemption for qualified health care items by treating various licensed health care professionals as if they were the consumer (rather than the retailer) of items that they provide to their patients and clients as part of their professional services. As such, tax is paid on the price that these professionals pay, rather than the price that they charge, for these items. Because the latter price typically is greater than the former price, less tax is paid. The program applies to the following professions and items:

• Optometrists, physicians, surgeons, and dispensing opticians with respect to ophthalmic materials, including eyeglasses and contact lenses.



• Chiropractors, with respect to vitamins, minerals, dietary supplements, and orthotic devices.



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



• Hearing aid dispensers, with respect to hearing aids.

• X-ray providers, with respect to materials and supplies for medical and dental x-rays, except for purely cosmetic purposes.

Rationale

This program provides tax relief to persons who purchase qualified items from health care professionals. This relief occurs to the extent that sales and use taxes levied on the full retail value of such products (versus their cost to health care professionals) ordinarily would increase their prices. The program's rationale is that these products are a component of good health care, which is a basic necessity, and therefore, their prices should not be subject to full taxation.

Comments

This program and others like it, which define the providers of goods as consumers, result in the partial exemption of such products from taxation. The amount of the exemption is tied to the value added to the product's retail price by the provider. The basic cost of the product to the provider, however, is subject to sales and use taxation.

Exclusion/Exemption:

Veterinarians Treated as Consumers

Description

This program treats a licensed veterinarian as a consumer (as opposed to as a retailer) of the drugs and medicines used or furnished in the performance of his or her professional services. As a consequence, the program partially exempts the retail value of such items from taxation.

Rationale

This program provides tax relief to the clientele of veterinarians. The amount of the tax relief relates to the difference between the price of such items to consumers and the cost of such items to veterinarians. The underlying rationale for the program is that medicines and drugs prescribed for animals are a necessity for these creatures and therefore, the price of the medicines should not be subject to full taxation.

Comments

The term "drugs and medicines" includes substances necessary for the diagnosis, cure, mitigation, treatment, or prevention of animal diseases. It excludes such items as shampoos, pet foods, flea powders and sprays, and vitamins. The largest uses of veterinary drugs are totally exempt from taxation, however. This is because the Board of Equalization's Sales Tax Regulation 1587 (2) (b) and (c) includes medicated feeds and drugs purchased to formulate medicated feeds under the general exemption for animal feeds. Consequently, the revenue loss from this program, though unknown, is probably relatively small.

Exclusion/Exemption:

Aircraft for Common Carriers or for Use by Foreign Governments or Nonresidents

Description

This program exempts from taxation the sale or use of aircraft which are to be used either as common carriers or outside of California. The program also exempts from taxation tangible personal property sold to an aircraft manufacturer and incorporated into such aircraft.

In order for aircraft or tangible personal property to qualify for the exemption, the operator's annual gross receipts from common carrier operations must either (1) exceed the lesser of 20 percent of the purchase cost of the aircraft or $50,000 or (2) the operator must provide evidence that the property is used for common carrier purposes. For leased property, the comparable limits are 10 percent and $25,000.

Rationale

This program reduces the prices at which the California airplane industry sells airplanes, thereby making the industry more competitive.

Comments

Although billions of dollars of sales are exempted from taxation under this program, little of that forgone tax liability would be realized in the program's absence. This is because aircraft sold to common carriers easily could be delivered to them outside of California. In that case, the transaction would be an interstate or international sale that is not subject to California taxation. There would be a compelling incentive to arrange such out-of-state purchase in most cases because the amount of tax avoided could be several million dollars on a modern commercial jetliner.

Exclusion/Exemption:

Trailers And Semitrailers Moved to Place of Sale

Description

This program exempts from taxation the use, storage, or other consumption in California of new or used semitrailers that (1) are not currently registered in any state and (2) are operated in the state for not more than five days as part of a continuous trip to a place where the vehicle will be offered for sale. To qualify for the exemption, the trailer or semitrailer must have obtained a one-trip permit issued by the California Department of Motor Vehicles. Under normal conditions, a use tax would be levied on the use of the vehicle for transporting goods in-state.

Rationale

This program provides tax relief to the operators of trailers and semitrailers operating under a one-trip permit. When this program first was established in 1986, the proponents offered the rationale that operators should not be charged, in essence, twice for their use of roads. Their view was that double-charging would occur in the absence of the program because operators of laden trailers would be required to pay for both (1) a one-trip permit and (2) use taxes based on the rental or sale value of the trailer.

Another suggested rationale for this program is that it simplifies tax administration, by relieving tax authorities from locating and assessing use taxes on one-trip operators.

Comments

Neither of the two rationales supporting this program is entirely satisfactory. Regarding the double taxation rationale, it fails to recognize that the use tax and the one-trip permit fee are for two separate purposes. In the case of the rationale relating to administrative simplicity, its significance is limited because use taxes could be assessed at the same time operators are issued their one-trip permits.

Despite the weaknesses of the rationales, even if the Legislature chose to eliminate this program, the state probably would realize relatively little revenue gain. This is because simply moving an empty trailer to a place of sale would not constitute a use that would be subject to tax. The effect of this program is to make it economically feasible for these trailers to carry freight when they are moved to a place of sale. In many cases, the earnings from this freight carriage would be less than the use tax, and trailer owners would therefore simply move their vehicles unladen (thus generating no tax liability) if the exemption were not available.

Exclusion/Exemption:

Qualified Watercraft and Their Component Parts

Description

This program exempts from sales and use taxation the sale, lease, or rental of a qualified watercraft and its component parts (including parts used in repairing or maintaining the vessel). In order to qualify for the program, the craft must either be (1) used in interstate or foreign commerce for the transportation of property or persons for hire, (2) used for commercial deep sea fishing operations outside of California's territorial waters, or (3) used 80 percent or more of the time in transporting for hire property or persons to vessels or offshore drilling platforms located outside of California's territorial waters.

In order for a vessel to qualify as a commercial deep sea fishing vessel, the operator's gross receipts from commercial fishing operations must be at least $20,000 per year, or the operator must provide evidence that the vessel is used for commercial deep sea fishing. In order to qualify as a watercraft used in interstate or foreign commerce, the operator's gross receipts must (1) exceed either 10 percent of the cost of the watercraft or $25,000 or (2) provide evidence that the vessel is used for qualifying commercial purposes.

Rationale

This program allows California watercraft builders and dealers, and vessel maintenance and repair businesses to reduce the prices at which their products may be provided, thereby making the California industry more competitive.

Exclusion/Exemption:

Vehicles, Vessels, and Aircraft Transferred Within a Family

Description

This program exempts from taxation the transfer of vehicles, vessels, and aircraft when the property is sold by the purchaser's parent, grandparent, child, grandchild, spouse, or brother or sister, (if both are minors).

The exemption also applies when the sale is to a trust in which: (1) the seller has an unrestricted power to revoke the trust; (2) the sale does not result in any change in the beneficial ownership of the property; (3) the trust provides that, upon its revocation, the property will revert wholly to the seller; and (4) the only consideration for the sale is the assumption by the trust of an existing loan for which the tangible personal property being transferred is the sole collateral.

Rationale

This program provides tax relief to persons who purchase vehicles, vessels, and aircraft from immediate family members. The program has two rationales. First, it is based on the view that families should be treated as units, so that transactions between family members should not be taxed. Second, it facilitates tax administration because intrafamily transactions are typically not at "arms length," and thus, the price paid could be difficult to determine and may not reflect the true market value of the vehicle, vessel, or aircraft.

Exclusion/Exemption:

New Vehicles Sold to Foreign Residents For Foreign Shipment

Description

This program exempts from taxation the sale or use of any new, noncommercial vehicle manufactured in the United States which is purchased by a foreign resident for shipment outside of the United States. The purchaser must (1) be a foreign resident, (2) arrange for purchase through an authorized dealer in the foreign country before arriving in the United States, and (3) obtain an "in-transit" permit from the California Department of Motor Vehicles (DMV) which is valid for up to 30 days. In addition, the retailer must ship or drive the vehicle out of the United States prior to the expiration of the in-transit permit.

Rationale

The program's intent is to promote the purchase and export of American-made passenger vehicles, and to increase tourism in the state. The program benefits foreign tourists by reducing the cost of purchasing an American-made car in California. Foreign countries currently provide similar programs for American citizens to purchase and operate vehicles overseas prior to their being shipped here. For California residents, such vehicles would become subject to the use tax upon registration.

Comments

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

Exclusion/Exemption:

Occasional Sales

Description

This program exempts occasional sales from taxation. An "occasional sale" is defined as either of the following types of transactions:

• The transfer of tangible personal property (except vehicles, vessels, and aircraft, which have their own program) when the seller is not required to hold a seller's permit. (A seller need not hold such a permit if he or she makes fewer than three sales for a substantial amount of money in a 12-month period.)



• Any transfer in which substantially all of the property held by an entity is transferred (except vehicles, vessels, and aircraft, which have their own program), provided that the real or ultimate ownership of such property is substantially similar to that which existed before the transfer. (This type of transfer most commonly involves corporate acquisitions and/or mergers.)

Rationale

This program exists in order to simplify tax administration. By exempting sales made by persons with a small number of sales, the program greatly reduces the number of persons and businesses that must register and file tax returns with the State Board of Equalization. Many of these additional sales would generate little additional revenue. For sales of entire businesses, the program's rationale is that these transactions are primarily changes in financial arrangements, as opposed to retail-related, even though the transfer of tangible property generally is included.

Comments

This exemption constitutes a major tax expenditure program from a fiscal perspective. It recognizes that enforcing sales tax collections by individuals making small private sales (such as a garage sale) is not realistically feasible. However, there is no limit on the value of any individual occasional sale, so that a seller can in fact make large (though infrequent) sales without incurring a tax liability.

Exclusion/Exemption:

Occasional Sales of Vehicles, Vessels, or Aircraft

Description

This program provides a sales tax exemption for occasional sales of vehicles, vessels, or aircraft. Specifically, any seller who is not required to hold a seller's permit for such sales by reason of the number, scope or character of the sales is exempt from the payment of the tax. For instance, the sale of vehicles by individuals would be exempt from taxation.

This program also exempts from taxation the transfer of certain types of vehicles and other property when, after the transfer, the real or ultimate ownership of the property is substantially similar to that which existed before the transfer. The program applies, among other items, to certain mobilehomes, commercial coaches, vehicles, vessels, and aircraft, when such property is included in the sale of an entire business that includes the transfer of substantially all the assets of that business.

The program does not apply to sales of vehicles by a retailer who is licensed under the California Vehicle Code as a manufacturer, remanufacturer, dealer, or dismantler. Further, the exemption does not apply to the rental payments made under a lease of tangible personal property.

Rationale

The rationale for this program is to simplify administration of the sales tax. Sales of vehicles, vessels, and aircraft by individuals or businesses that do not regularly deal in these items would be difficult to identify and tax. This is because the seller may not be registered, or the sale is outside the seller's regular sphere of activities.

The business-related program provides tax relief to owners of businesses that are sold or reorganized. The program's rationale is that the real or ultimate ownership of the assets is unchanged.

Comments

The program does not provide a use tax exemption. The buyer must pay use tax when registering the vehicle, vessel, or aircraft unless some other exemption applies.

The business-related program is identical to the occasional sale exemption provided for the transfer of other property in the sale of an entire business (see program entitled "Occasional Sales"). The occasional sale exemption, however, specifically excludes vehicles, vessels, and aircraft, which are addressed in this exemption.

Exclusion/Exemption:

Occasional Sales of Other Products by Hay Producers

Description

This program exempts a producer of hay from liability for sales and use taxes on occasional sales of tangible personal property other than hay. To qualify, the sales must not be of such number, scope, and character that they would be taxable if the producer were not also selling hay.

Rationale

This program provides tax relief to the consumers of tangible personal property, such as tractors, sold by hay producers. The program is based on the rationale that it equalizes treatment of hay producers and other farmers. In the absence of this program, a farmer who is required to hold a seller's permit because 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 implements used in producing the hay. (This is because all of the sales at retail of a person holding a seller's permit are subject to the sales and use tax.) However, as program proponents point out, other farmers, such as lettuce producers who conduct no taxable retail sales, do not have to hold a seller's permit and, consequently, do not have to collect sales tax on occasional sales of their farm equipment. This program extends this tax treatment to hay farmers.

Comments

Other businesses (such as manufacturers) which generally hold seller's permits but do not benefit from programs such as this, are subject to the sales tax upon sales of tangible assets of their business.

Exclusion/Exemption:

Membership Fees Charged by Consumer Cooperatives

Description

This program exempts from taxation the membership fees charged by consumer cooperatives. The imputed value of any labor provided to a cooperative by a member in lieu of monthly membership fees also is tax exempt. In the absence of this program, the Board of Equalization could consider cooperative membership fees (both monetary and in-kind payments) as part of the purchase price of goods sold by consumer cooperatives and, therefore, taxable.

Rationale

This program provides tax relief to members of consumer cooperatives to the extent that sales and use taxes levied on membership fees ordinarily would increase the costs of belonging to, and buying from, such cooperatives. At the time the program was adopted, proponents argued that the membership fees cooperatives levy are not directly related to the prices they charge for products. Rather, they argued that cooperatives are akin to organizations such as sports clubs, whose membership fees are not directly related to the frequency of facility use. Thus, the program's proponents argue that it provides tax equity between the cooperatives and other organizations such as private clubs.

Exclusion/Exemption:

Clothing Alterations by Clothes Cleaning and Dyeing Businesses

Description

This program defines an operator of a qualified state-licensed clothes cleaning or clothes dyeing business as the consumer (as opposed to the retailer) of the materials and supplies used or furnished in altering clothing. While the operators pay sales taxes on these materials, the value of the alterations are exempt from the sales tax. Such operators thus pay sales tax on the price they pay rather than on the price they charge for the materials.

To qualify for the program, the business involved may receive no more than 20 percent of its gross receipts from the alteration of garments. Also, the business may operate only as a pick-up and delivery point for garment cleaning, or provide spotting and pressing services (but not garment cleaning), or operate a garment cleaning or dyeing plant on the premises. In addition, 75 percent of the business' total receipts must represent charges for garment cleaning or dyeing services.

Rationale

This program provides tax relief to the customers of cleaners that have their clothes altered. According to the State Board of Equalization, the basic rationale for this program is that it simplifies the process of tax administration. This is because, in the absence of the program, many small cleaning establishments would be required to register as retailers, even though clothing alterations are an incidental part of their overall operations.

Exclusion/Exemption:

Flags Sold By Veterans' Groups

Description

This program defines nonprofit veterans' organizations as consumers of the U.S. flags they sell, provided that the proceeds of the sales are used exclusively to further the purposes of the veterans' organization. As defined consumers, such organizations pay sales tax on the price they pay rather than on the price they charge for the flags they sell, resulting in a partial tax exemption based on this price differential.

Rationale

This program provides an incentive for persons to support the activities of nonprofit veterans' organizations by granting tax relief to those who purchase U.S. flags sold by the organizations. The program has the effect of partially exempting the retail value of such flags from taxation, thereby increasing their marketability. The underlying rationale for the program is the view that the purposes and activities of veterans' organizations are worthy of public financial support.

Exclusion/Exemption:

Vending Machine Sales of Nonprofit Operators

Description

Exclusion/Exemption:

This program treats as consumers certain operators of vending machines that dispense items selling for 15 cents or less. As such, the sales and use tax they are subject to is based on the price they pay for the items sold rather than based on the sales price. In order to qualify for the program, an operator must be a nonprofit, charitable border, or educational organization.

Rationale

This program provides tax relief to qualifying vending machine operators and their customers, to the extent that sales and use taxes levied on the full retail price of dispensed items (versus their cost to operators) would ordinarily increase their prices and reduce their marketability. One rationale for the program is that the levying of sales and use taxes on individual vending machine products is impractical, since the exact amount of the tax cannot be conveniently incorporated into the coinage charge. A second rationale is that qualifying organizations provide socially beneficial services, and therefore, their fund- raising efforts and other activities are worthy of public financial support.

Comments

The effect of this program is limited to nonfood items. Food items sold in vending machines for no more than 15 cents (or 25 cents for bulk products) are effectively exempt from taxation, regardless of whether the vendor is nonprofit or profitmaking.

Exclusion/Exemption:

Photocopy Sales By Libraries

Description

This program defines certain libraries or their contracted vendors as the consumers of photocopies sold through coin-operated photocopying machines. Consequently, libraries pay sales tax on the purchase of the photocopy machine and supplies, rather than on the sales price of a photocopy. This has the effect of partially exempting the retail value of a photocopy from taxation. This program applies to any library district, municipal library, or county library. The photocopies must be sold from a coin-operated machine located at the library facility in order to qualify for the exemption.

Rationale

This program provides tax relief to qualifying libraries and their patrons by reducing the costs of providing photocopying services. The program has several rationales. One is that the levying of sales and use taxes on individual machine-sold photocopies is impractical, since the exact amount of the tax cannot be conveniently incorporated into the coinage charge. Another is that photocopy services serve a worthy public goal of enabling library patrons to make better use of library facilities and information.

Exclusion/Exemption:

Prisoner-of-War Bracelet Sellers

Description

This program defines qualified sellers as consumers of bracelets commemorating American prisoners of war, and thus bases their taxation on the prices the sellers pay for the bracelets rather than the sales price. To qualify for the program, a seller must be an organization which (1) is formed and operated for a charitable border purpose and (2) qualifies for the welfare (local property tax) exemption. In addition, the organization's profits must be used exclusively to further the purposes for which it has been established.

Rationale

This program provides tax relief to qualifying bracelet-distributing charitable border organizations and their patrons. It accomplishes this by reducing the costs or prices at which such bracelets may be provided or sold, thereby increasing the scope of their distribution. The program's underlying rationale is that the distribution of commemorative prisoner-of- war bracelets furthers the effort to locate and identify prisoners of war.

Comments

The California Department of Veterans Affairs indicates that, to its knowledge, only a very limited number of prisoner-of-war bracelets are currently being sold.

Exclusion/Exemption:

Veterans Memorial Lapel Pins

Description

This program exempts from taxation the sale, storage, or use of "Buddy Poppies" or any other symbolic impermanent lapel pin that (1) memorializes military veterans killed in foreign wars and (2) is sold by veterans' groups.

Rationale

This program provides an incentive for persons to support work done by veterans' organizations by providing tax relief for those who purchase lapel pins sold by these organizations. The Buddy Poppy program, for example, has been used to raise funds to assist disabled veterans. The underlying rationale for this tax exemption program is the view that the purposes and activities of veterans' organizations are worthy of public financial support.

Exclusion/Exemption:

Qualified Sales of Youth Groups

Description

This program treats qualified youth group organizations as consumers of the food products, nonalcoholic beverages, and certain other items that they sell. This has the effect of either fully exempting (in the case of most food products, which are not subject to the sales tax when purchased by these groups, but could be subject to sales tax when resold by them) or partially exempting (for other items for which the sales tax on their purchase price is less than the sales tax on the resale price) the retail value of these products from taxation. Nonfood items must be made by members of the organization in order to receive this treatment. In order to qualify for the program, a group must (1) use its profits exclusively to further its purpose(s), (2) conduct sales only on an intermittent or irregular basis, and (3) be included in one of the following categories:

• Nonprofit groups that are nondiscriminatory and provide a program of competitive sports or promote good citizenship.



• Groups sponsored or affiliated with a qualifying educational institution.



• Specific named groups, including the Young Men's Christian Association, Boy Scouts, Girl Scouts, Bobby Sox, Future Farmers of America, and Vocational Industrial Clubs of America.

Rationale

This program provides tax relief to qualifying youth organizations and to individuals and businesses who purchase products they sell. It accomplishes this by reducing the costs and prices at which these products can be provided and sold, thereby making them more marketable border and increasing their sales potential. The program thus has the effect of giving incentives for such organizations to undertake fund-raising activities and for patrons to support them. The program's rationale is that the objectives and activities of the qualifying organizations are socially desirable and worthy of public financial support.

Comments

Youth groups often operate food stands at sports events and fairs, or organize fundraising meals, in order to support their activities. Many of these food sales would be taxable in the absence of this program. This is because the food is sold in a hot, prepared form (such as hamburgers or hotdogs), as a meal, or for onsite consumption at an event. Since the food supplies purchased by these organizations are not taxable under the general food exemption, this program results in a full exemption for their sales to consumers (with the exception of carbonated beverages). The program also applies to nonfood items that are made by members of the organization itself, in which case the group pays sales tax on the materials and supplies that it uses, but the finished item is not taxable.

Chapter 116, Statutes of 1990 (AB 520, Klehs), eliminated a previous requirement that youth groups that were not specifically named in statute were required to obtain prior approval from the Board of Equalization in order to qualify for this program.

Exclusion/Exemption:

Yearbook and Catalog Sales by Student Organizations

Description

This program defines qualified student organizations as consumers of the yearbooks and catalogues they distribute. Consequently, the organizations pay sales tax on their purchase price of such items, rather than on the price at which they resell them. This has the effect of partially exempting from taxation the retail value of these items. The program applies to any public or private school, school district, county office of education, or student organization.

Rationale

This program provides tax relief to student organizations and students, to the extent that sales and use taxes on the full retail value (versus acquisition cost) of yearbooks and catalogues ordinarily would increase their prices. The rationale for the program is that such catalogues and yearbooks are a fundamental part of the schooling experience, and therefore, the costs of such items should not be increased by fully taxing such purchases.

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