Legislative Analyst's Office, February 1999

California's
Tax Expenditure Programs

Sales and Use Tax Programs--Overview


This section provides information on tax expenditure programs (TEPs) associated with the sales and use tax paid by individuals and businesses. These TEPs affect the amount of General Fund and special funds revenues raised by the sales and use tax, the second largest source of state revenues. These TEPs also have an impact on local government revenues since (except in certain instances) the programs affect both the state and local portions of sales and use tax receipts. The following provides a brief description of this tax.

General Background Information

The sales and use tax is levied on the gross receipts of personal property sold or transferred to an individual or business considered to be the final consumer. The sales and use tax actually consists of two complementary taxes:

Sales Tax. The sales tax portion is the more familiar of the two taxes and is levied on the total purchase price of tangible personal property sold in California, except for items specifically exempted from taxation by law.

Use Tax. In contrast, the use tax generally applies to the storage, use, or other consumption in this state of goods purchased from retailers in transactions not subject to the sales tax, generally for purchases shipped into California from another state.

The following example is helpful in demonstrating how the use tax works. If an automobile is purchased in Oregon by a California resident who intends to use the vehicle in California, then the individual would pay the California use tax on the retail price of the car. Without a use tax, such a consumer could avoid paying a tax on a vehicle to be used within California, by purchasing it outside the state and then bringing it into California. State automobile registration requirements make feasible the collection of the use tax on vehicles brought in from out of state. Central registration requirements also facilitate the collection of use tax for water vessels, aircraft, and mobilehomes. For other types of purchases, registered taxpayers involved in sales activities are required to report taxable out-of-state purchases on their quarterly sales and use tax returns.

Collection Responsibility. A seller is responsible for remitting the sales and use tax to the state, although he/she may try to "pass" the tax on to the purchaser through higher prices. The extent to which the sales and use tax is passed on to the purchaser through higher prices is dependent on the supply and demand characteristics of the particular commodity and market involved. Regardless of who bears the ultimate financial burden or "incidence" of the tax, however, the seller is legally responsible for collecting and remitting all tax payments to the Board of Equalization (BOE), the state agency in charge of administering the sales and use tax.

Characteristics of the California Sales and Use Tax

Tax Rate. The sales and use tax was first imposed in California in 1933.The tax rate has generally increased since that time, although there have been periodic decreases as well. Additions and subtractions to the sales and use tax base have also taken place through changes in exempted transactions.

The basic sales and use tax rate consists of both a state rate and a local rate. Figure 1 provides a breakdown of the current tax rate levied in California.

Figure 1
Sales and Use Tax Rates
State
General Fund 5.00%
Local Revenue Fund .50
Local Public Safety Fund .50
Subtotal 6.00%
Local
Uniform 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 and County (1.75 percent), San Mateo County (2 percent), and San Diego County (1 percent).
Source: Board of Equalization


State Tax Rate. The current state sales and use tax rate is 6 percent. As Figure 1 shows, 5 percent of the state sales and use tax rate is dedicated to the General Fund. In addition, a 0.5 percent rate is dedicated to the Local Revenue Fund, which is earmarked for health and welfare costs associated with the 1991 state-local government realignment program. A second 0.5 percent state tax levy is dedicated for local public safety programs and is allocated directly to localities through the Local Public Safety Fund. Figure 2 summarizes how the state's General Fund tax rate has changed from the mid-1930s to the present.

Local Tax Rate. As shown in Figure 1, the Bradley-Burns Uniform Local Tax is a 1.25 percent levy, consisting of a 1 percent tax that is allocated to local governments for general purposes and a 0.25 percent levy that is dedicated for county transportation purposes. Localities also have the option of imposing, with voter approval, up to a 1.5 percent transactions and use tax. (San Francisco City and County and San Mateo County, however, are allowed to exceed this maximum rate by 0.25 percent and 0.5 percent, respectively.) Some of these local revenues may be used for general purposes, but they have primarily been imposed for transportation-related purposes.

Figure 2
State Sales and Use Tax Rates

(General Fund)

Tax Rate
1933-34 2.50%
1935-42 3.00
1943-48 2.50
1949-66 3.00
1967-71 4.00
1972 3.75
1973 4.75
1973 3.75
1974-90 4.75
1991-92 5.50
1993 to present 5.00
Source: Board of Equalization


Given the above, the combined state-local sales and use tax rate in California varies by county. As shown in Figure 3, actual rates as of January 1, 1999, ranged from a low of 7.25 percent to a high of 8.5 percent. The estimated revenue reductions shown in the following TEP reviews include effects on both the state and local governments.

Tax Base. The sales and use tax base consists of all items that are potentially taxable under current law, minus various exemptions and exclusions (the latter are discussed in detail in the reviews that follow). In general, any tangible asset that is moveable (that is, not permanently attached to property) which is sold and subsequently used, consumed, or stored in California is subject to the sales and use tax. However, there are some general exceptions to this rule, including the following:

While items purchased outside of California and transported into and used within the state are technically subject to the use tax, only in cases where there are centralized registration requirements or the purchases are made by registered sales tax payers does the state actually collect the tax. For example, no use tax is collected from individuals who purchase goods through mail-order, Internet, or other related means.

In addition, California generally does not directly tax services when these represent the final product (although there are a limited number of exemptions to this general rule, such as photocopying services and gift wrapping services). However, services that contribute to the production or delivery of a tangible product sold are indirectly subject to the sales and use tax through the explicit or implicit incorporation of the cost of such services in the price of the tangible product. Such services include, for example, food service at restaurants and assembly and delivery activities.


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