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Report #2aCalifornia’s Tax System –
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Download or pick up: Why is one tax-free? SF Chronicle 7/11/07 California's 20th Century Sales Tax LA Times 7/18/07 Obstacles to Taxing Services — Are They Insurmountable? AICPA Corporate Tax Insider, 2/28/08 Taxing Some Services Could Help if It's Fair and Simple, San Jose Mercury News, 6/29/08 |
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Annette
Nellen Tax
Professor at Introduction One of the weaknesses in California’s sales tax is that the tax base is too narrow. A sales tax is a consumption tax, yet many types of consumption of individuals are exempt from the sales tax for a variety of reasons. For example, the California sales and use tax does not apply to the following consumer purchases: grocery store food, theater tickets, haircuts, storage fees, pet care, legal services, and software and music purchased and downloaded online. Some of the exempt consumption today is a digital substitute for taxable tangible personal property. For example, if a consumer buys a CD at a music store, sales tax is owed. If the consumer instead downloads the same music from a computer, no sales tax is owed. Since the sales tax was enacted in the 1930’s, consumption of intangibles (such as digital items) and services has increased while the consumption of tangible personal property has decreased. This leads to a shrinking tax base for the state. It also creates another form of a digital and class divide in that consumption of non-taxable services and intangibles is more significant for higher income consumers while consumption of taxable tangible personal property can be more significant for lower income consumers. It is not the intent of this report to call for the taxation of all types of consumption as there may be policy reasons to make some items (such as basic medical care) tax exempt. Instead the purpose is to point out and explain tax base weaknesses with the sales and use tax, describe the advantages and disadvantages of broadening (updating) the tax base, and note ways this can be accomplished. For example, broadening the sales tax base would not only make the system more equitable, it would also allow for California’s high tax rate to be lowered (which would also make the tax more equitable). If desired, there is also revenue potential in this weakness. Data is provided to explain the tax base weakness. Information on a few other states is provided as well to provide some context in understanding ways that California’s sales and use tax is out of sync with states that have made changes to modernize their sales and use tax. Recommendations for change are provided and a tax policy analysis is included to indicate how addressing the tax base weakness would help the sales tax to better meet the principles of good tax policy. Weakness: The sales and use tax base is too narrow in that many consumption items are exempt. Remedy: Broaden the base, lower the tax rate, and address issues of compliance and adverse impact to low-income individuals.
Brief History of the California Sales and Use Tax California's sales tax was created in 1933 with the Retail Sales Act. The tax was to be imposed on retailers for the privilege of selling tangible personal property. In 1935, the use tax was enacted to complement the sales tax to ensure that in situations where a retailer was not obligated to collect sales tax (such as because it was not located in California), the California consumer would be obligated to pay use tax at the same rate. While the sales tax is imposed upon the retailer (although they can add it to what the buyer pays), the use tax is legally imposed upon the purchaser. In the 1940’s, some cities began assessing a local sales tax. By 1954, about half of California cities imposed a sales tax which produced significant revenue for them. Each city administered its sales tax on its own. In response to complexity concerns raised by businesses, the legislature enacted the Bradley-Burns Uniform Local Sales Tax Act in 1955. The Act allowed counties and cities to impose a sales tax with a base similar to that of the state and administered at the state level. Effective July 15, 1991, the legislature repealed the exemption for food snacks making them subject to sales tax. Challenges with defining “snack” led to consumer and vendor frustration. Proposition 163 was placed on the ballot in November 1993 and passed. This proposition repealed the snack tax and amended the California Constitution, effective 12/1/92. Following this change, Article XIII, Section 34 of the California Constitution reads: “Neither the State of California nor any of its political subdivisions shall levy or collect a sales or use tax on the sale of, or the storage, use or other consumption in this State of food products for human consumption except as provided by statute as of the effective date of this section.” The combined state and local sales tax rate in California is 7.25% (January 2003). Some areas also have district sales tax(es), with the result that the rate varies among counties from 7.25% to 8.75%. The 7.25% California sales tax rate is composed of the following elements:
District taxes range from 0.125% to 0.50% per district. A county may have more than one district within it or it may have no districts. For example, the tax rate in Santa Clara County is 8.25%, comprised of the standard 7.25% and two district taxes of 0.50% each.
The Need to Periodically Review Tax Systems Ways of living and doing business continually change. These changes often call for changes in the tax system so that the system continues to serve its function and makes sense given current types of transactions. This need for review was stated well in a 1967 report of the Ohio Tax Study Commission:[i] "Relationship to the Modern Economy - Insofar as possible, a tax or tax structure should be capable of growing with the economy of the state and should be revised from time to time so as to correspond with the true makeup of that economy as it develops and changes. Some products, habits of consumption, and classes of enterprise decline, while others rise to take their place. Ideally, a tax structure should be reviewed and revised as necessary so as to bear a relationship to the way people are doing things, regardless of whether additional revenues are needed at a given time."
The Tax Base and Exemptions Because the California sales and use tax rules specifically apply to tangible personal property, sales and purchases of services and intangibles are exempt from the tax. However, there are a few exceptions. If the service is embedded in the goods or if an intangible (such as a film) can be viewed as tangible, it will likely be taxed. The California Revenue & Taxation Code has many rules that explain taxable tangible personal property. For example, where the consumer directly or indirectly provides materials to a business that fabricates an item from them, that labor is included in the sales price and taxable (R&T Section 6006). Similarly, a restaurant's prices may not be separated between services and food; instead, the entire restaurant bill is subject to sales tax. In addition to items or services that are not subject to the sales and use tax because they are not tangible personal property, California law provides many exemptions where an item of tangible personal property is not subject to tax. The law may address a specific item, such as ice used to pack food for transportation (R&T Section 6359.7). Or, the exemption benefits a seller such as because they are a charitable organization (for example, R&T Section 6360 provides that a charitable organization selling certain prisoner of war bracelets is not subject to sales tax on the bracelets). The Board of Equalization (BOE) has categorized the reasons underlying exemptions and exclusions to the sales and use tax in its Publication 61, Sales and Use Taxes: Exemptions and Exclusions (http://www.boe.ca.gov/pdf/pub61.pdf). The categories used are:
The categories and some examples from each are listed in the chart below. The chart also includes other BOE information on the revenue that is “lost” (as estimated by the BOE) due to the exclusion or exemption. The California Department of Finance also publishes an annual report of tax expenditures which summarizes the sales and use tax exemptions and their estimated “cost” to the state.[ii]
* The revenue loss refers to revenue that is not realized by state and local governments due to an exemption or exclusion. Data is based on the latest available to the Board of Equalization as of June 2005 (the date of Publication 61). ** When the California sales tax was enacted in 1933, food was not exempt. The exemption for food was added in 1935.[iv]
Context: The measured revenue loss from exemptions and exclusions in the California sales and use tax law totals $10.6 billion annually. If some of these exemptions and exclusions were to be removed, the tax rate could be lowered and relief for low-income taxpayers provided through other means, such as a refundable income tax credit. The specific changes in base and rate that could be made would be within the purview of the legislators and governor, as would the decision as to whether the changes would be made to not only broaden the base and reduce the tax rate, but to also generate additional annual revenue. To give the $10.6 billion annual revenue loss figure some context, consider the comparisons in the following chart.
a Thus, if the rate used to measure the revenue loss in Pub 61 was 8%, then the rate used in this column would be 6% (75% of 8%). b Source: Legislative Analyst’s Office, California’s Tax System: A Primer (2007); available at http://www.lao.ca.gov/2007/tax_primer/tax_primer_040907.aspx. c Source: Legislative Analyst’s Office, 2007-08: Overview of the Governor’s Budget (1/07); available at http://www.lao.ca.gov/2007/budget_overview/07-08_budget_ov.htm.
Observations: Caution should be exercised in reviewing the revenue loss figures. They do not realistically represent revenue that could be raised if the exemption or exclusion were removed. For example, if the exemption for food were to be repealed, there would need to be some type of relief provided for low income households which would use some of the revenue generated from the base broadening. Also, a broadening of the base should be accompanied by a reduction in the tax rate to avoid an unneeded revenue windfall to the state and a significant tax increase to all taxpayers. In addition, application of the sales tax to currently untaxed items might lead to some drop in purchases or price reductions by sellers. The revenue loss of many of the items in the list of exemptions and exclusions was not measured by the BOE. For example, the exemption for most services was not measured. Many states, do tax personal services, such as haircuts and lawn care. Also, entertainment services, such as theater and movie tickets were not measured and several states today tax these items. Thus, if the list of exemptions and exclusions is used to identify revenue sources, it is important to also consider the items not measured. Also, in reviewing how the sales tax base could be broadened to include more types of personal consumption, it is important to note that several of the items listed by the BOE are ones that arguably should not be in the base, even a broadened one. For example: § The Board’s list of exemptions and exclusions includes cash discounts offered by the seller. Arguably, these are really not part of the sales price of an item. When a cash discount is given, the tax should be imposed on the discounted price since that is the true retail price. § The list also includes items that are not sourced to California under California’s destination approach. That is, if the item is sold to a person residing outside of California, the California sales tax would not apply. Instead, the sales tax of the jurisdiction where the buyer resides (the destination) would apply. § Another listed exemption is on the local and district sales tax imposed on an item. This is a decision to be made in designing the law – should the state tax be imposed on the tax inclusive or tax exclusive price of the item. To avoid imposing a tax on a tax, it is likely that most people would argue for not imposing the state sales tax on the retail price with the local sales tax included. § There are often transactions where the cost of collecting the tax may outweigh the revenue collected. For example, assume a small non-profit school organization generates funds by selling t-shirts to students at the school. If it were required to collect sales tax and complete the forms, the compliance cost might outweigh the funds raised. If the non-profit is required to pay sales tax when it buys the t-shirts (rather than treating them as a non-taxable sale for resale), the lost tax revenue would only be on the mark-up, and likely, minimal. This is a policy decision for lawmakers: should certain organizations with a specified amount of minimal sales be allowed to sell tax exempt or should a simplified compliance method be created to aid them? In 2006, New Jersey expanded its sales tax base to include more services as well as “digital property.” The legislature estimated the revenue to be generated for the first nine months of this change. Following is their data annualized (in millions):[v]
Changes in Consumption In the 1930’s when California’s (and most other state’s) sales taxes were created to be imposed on tangible personal property, that was the significant consumption item. Consumption of digital items did not exist and consumption of personal services was likely much less than it is today. Life has changed dramatically since the 1930s. More types of entertainment are available today than in the 1930s including television, participant and spectator sports, theaters and a variety of digital entertainment. Growth in the number of 2-earner families leads to greater need for services such as child care, housecleaning and gardening. The closing of Tower Record stores in 2006 is a good example of recent changes in consumption patterns as digitally downloaded music becomes the preferred way to purchase music.[vi] The ability and convenience of downloading software programs via the Internet rather than purchasing them on tangible media is also leading more of this consumption item to move from the taxable personal property category (off-the-shelf software on a CD) to a non-taxable category even though, like the music, the consumer ends up with the same result – the ability to listen to their favorite music or use software. In addition, changes in technology have created some new products and services that didn’t even exist a decade ago, such as ring tones for mobile phones, or the ability to play a game with people who are not in the same room with you. The following data illustrate some of the changed and changing consumption patterns. Data on broadband deployment is also included since that type of powerful Internet access is needed to enable more types of consumption to occur digitally (such as software, music, games, and movies). Greater use of broadband will lead to a further decrease in taxable tangible personal property consumption and an increase in non-taxable consumption. § Changes in consumption have led to a drop in sales that are subject to the California sales tax. The Center on Budget and Policy Priorities reports that from 1990 – 2003, the percentage of sales subject to sales tax in California dropped by 13.4 percentage points. The median decline in the U.S. was only 8 points.[vii] § The Legislative Analyst’s Office (LAO) noted that in 1981, 48% of consumption represented items subject to the California sales tax, but that amount dropped to 38% by 2005.[viii] § A 2002 legislative research study in Minnesota reported that in 1967, about 40% of personal consumption was of services and in 1999 that percentage had increased to 60%.[ix] The Center on Budget and Policy Priorities reports that from 1970 to 2001, consumption of tangible personal property minus groceries dropped from 39% of household consumption to 33%. In addition, from 1970 to 2001, consumption of services increased from 31% of household consumption to 44%.[x] § In the 1990’s, spending in the U.S. on media and information services increased from $365 to $641 per person.[xi] § The growth in micropayment revenue from 2003 to 2009 is estimated to be 23%. Micropayments are defined as under $5 per transaction. Researchers estimate that growth will take place not so much because the technology for handling small payments has advanced, but that the number of opportunities for low-cost online transactions, such as music or information, will grow.[xii] § The U.S. Census Bureau estimated that for 2003, 41% of households with income under $25,000 had a computer, compared to 94.7% for households with $100,000 or more of income. The Bureau also estimated that in 2003, 30.7% of households with income under $25,000 had Internet access compared to 92.2% for households with $100,000 or more of income.[xiii] § Adoption of broadband in U.S. households increased 40% from March 2005 to March 2006 which was double the growth rate from the prior year.[xiv] § In March 2006, 21% of households with income below $30,000 had broadband access while 68% of households with income over $75,000 had such access.[xv] § A 2004 press release by Nielsen//NetRatings was entitled, “Affluent Americans Power Internet Growth.” The report noted that at the income level of $150,000 or more, 69% of Internet users used broadband while 31% used narrowband. In contrast, in households with income under $25,000, broadband use was 25% which narrowband use was 75%.[xvi] § It has become more common to use certain software tools, such as those for tax preparation and bookkeeping, online rather than purchasing the software on a CD and loading it on a personal computer. [xvii] This marketing technique tends to make the transaction more of a service rather than a distribution of goods. § Jupiter Research reports that in 2006, downloads of digital music increased more than 30%. They estimate that spending on digital music in the U.S. will be $2.5 billion by 2011. They also estimate that by 2011, 22% of music spending by U.S. consumers will be digital, and ring tones will represent 12% of such spending.[xviii] § Growth of iTunes: In April 2007, Apple Computer’s sales of iPods reached 100 million (sales started in 2001). Apple also reported that its iTunes Store has sold downloads of over 2.5 billion songs, 50 million TV shows and 1.3 million movies.[xix] As reported in February 2008, Apple’s iTunes Store is the second largest music retailer in the U.S. This data, from NPD Group also noted that in 2007 about 1 million people stopped buying CDs.[xx] In June 2007, iTunes was ranked third with about 10% of the market. The largest music retailer in June was WalMart (15.8%) followed by Best Buy (13.8%).[xxi] On April 3, 2008, Apple announced that iTunes sales had passed those of Wal-Mart making iTunes the largest music retailer in the U.S. (based on data from the NPD Group). Apple noted that iTunes has over 50 billion customers and has sold more than 4 billion songs in less than 5 years.[xxii] § In 2007, eMarketer estimates that individuals in the US spent $1.1 billion for music to be listened to on their mobile phones. The research firm estimates that this amount will be $2.8 billion in 2011.[xxiii] § There is increased use of computers to play video games, rather than using game consoles and purchasing games on tangible media. A 2004 report indicated that revenues from online games would triple by 2008 to $1.1 billion. The study also expected revenues from multi-player online games to more than double from 2004 to 2008.[xxiv] The ability to play games online without purchasing a tangible product (other than the computer) has generated a market that consists of both digital items, as well as services – connecting people across the globe to play together (“massive multiplayer online role-playing game” or MMORPG) and creation of tournaments that people can pay a fee to enter and play. The fee structure and revenue models vary such that it may look like the purchase of a game, an entry fee, or a subscription fee.
Why Broaden the Tax Base Reasons for broadening the sales and use tax base include the following. 1. The California sales tax rate is already high (roughly 8%, but varies from county to county). Broadening the base would enable the rate to be lowered. California’s state rate of 6.25% is the 8th highest among state tax rates, as of January 1, 2007. The highest state rate is 7% and the lowest (not counting the few states that do not impose a sales tax) is 4%. Selected state sales tax rates:[xxv] Massachusetts 5.0% Michigan 6.0% Mississippi 7.0% Nevada 6.5% New Jersey 7.0% New York 4.0% Washington 6.25% It is not uncommon to have proposals to increase the sales tax rate to raise revenue. Given the already high sales tax rate in California and the changes in consumption from taxable goods to non-taxable intangibles and services, a rate increase is not the ideal technique to generate more sales tax. (This is further explained in the tax policy analysis at the end of this report.) 2. Economically, there is no rationale for taxing some forms of personal consumption while exempting others. That is, there is no reason to tax laundry detergent, but not dry cleaning services. Similarly, there is no reason to tax a game in a box but not one played only on the Internet. The current exemption for intangible and services seems to be primarily based on history in that when the sales tax was created in 1933, tangible personal property was the key consumption item. 3. Some exemptions reach beyond the intent of the exemption. For example, the exemption for food includes milk and vegetables, but also a $30 block of cheese purchased at a gourmet grocery store, candy, and bottled water. Assuming the food exemption is to benefit purchases that are necessities of life (as described by the BOE), it is too broad and not targeted to the taxpayers needing relief. Another option is to tax all food but then provide relief to low-income individuals through other means such as a refundable income tax credit. The exemption for utilities has the same flaw – it is not targeted to provide relief to individuals who most need it. Instead, everyone, regardless of income level and the size of their house does not have to pay sales tax on their utility bills. 4. As consumers have increased their consumption of services and intangibles (such as digital downloads) and decreased their consumption of tangible personal property (see data above), the sales tax base becomes outdated and generates less tax revenue. 5. As noted in the data presented earlier, some changes in consumption patterns are not consistent across income groups. For example, consumption of digital goods and services are more significant for higher income individuals than for lower income individuals raising issues of fairness and equity with the current narrow tax base. 6. A broader base can make a tax more stable (less volatile). For example, in an economic downturn, people may purchase fewer tangible goods, such as cars and household appliances. However, consumption of food and some services may not drop as quickly enabling tax collections to not be as severely affected as could happen with a narrower tax base. 7. Other states tend to have a broader sales tax base than does California. A majority of states tax off-the-shelf software whether transferred on tangible media or electronically. These states include Arizona, Massachusetts (effective 4/1/06), Michigan, Minnesota, New York, North Carolina (effective 7/15/03), Ohio, Texas, Washington, and Wisconsin. In addition, other states tend to tax more types of services relative to California. Starting in 1990, the Federation of Tax Administrators (FTA) has studied the sales tax treatment of 160 services by the states, with periodic updates. Changes in some states expanded the FTA’s list of services tracked in the survey to 168 in 2004. Hawaii and New Mexico tax the greatest number of services. Of the 168 types of services studied, at 6/1/04, the FTA found the following:[xxvi]
8. California cities tend to be fairly dependent on the sales and use tax. Today, one technique for increasing local revenues is to bring large retailers into the city or a corporate sales office in order to generate sales tax. A broader base would likely lead cities to be more equitable in decisions regarding economic development by also making it desirable to have businesses that do not sell tangible personal property. 9. Exemptions and exclusions for any tax should be reviewed periodically to determine whether the original reason for their creation remains valid. 10. A broader tax base can improve the ability of a tax to meet the principles of simplicity, efficiency and fairness. Tax laws are complicated whenever something is exempt from the tax or subject to a special rule. Exceptions require special definitions which are not always easy to write or enforce. For example, several years ago, California started taxing snack food but then found it was very difficult to define a snack and the tax was later repealed. A tax base with few exceptions not only allows for a lower rate, it can also improve compliance and administration, and lead people to view the tax as more fair (because everyone is paying the tax or all consumption items are subject to the tax). Application of the sales tax to all non-real property consumption of individual consumers can simplify the law by eliminating the need for defining exemptions. Relief for necessities of life can be provided through other means, such as a refundable income tax credit or a special medical deduction or credit for sales tax on health care (if that consumption item were included in the sales tax base).
Challenges Change in general: While in theory, it may seem simple to broaden the sales tax base and lower the tax rate, in reality, such a change is complicated and politically challenging. First, any change is difficult in that people are very used to what they currently know. Consumers are likely to view any change as a tax increase (even if the rate is lowered) if something they did not pay tax on before, such as digital downloaded items, becomes taxable. Businesses will also face challenges of learning new rules to determine what is taxable and what is not taxable. Also, some businesses that currently have no sales tax filing obligations will have increased compliance costs of filing returns. Of course, businesses that have been collecting sales tax and filing returns are unlikely to be sympathetic to such concerns. Also, once an exemption exists, it is difficult to remove. As President Bush noted in 2007: “It’s much easier to get something in the code than get it out of the code.”[xxvii] A comprehensive study of California taxes in 1964 also noted the challenge of removing exemptions, noting that what usually happens is the exemption grows once in the law. “Once an exemption is adopted, efforts are made to enlarge its scope. Experience has produced the expression “exemptions beget exemptions.” When individuals and businesses can choose between items subject to tax and those not subject to tax, manipulations result which invite pressures from others for broadening of exemptions to eliminate unfair competition.”[xxviii] Finally, there are likely some consumption items people will strongly object to paying tax on, particularly those in the “necessity of life” category such as food and health care. Yet, change is possible, and perhaps even required given economic and societal changes that have occurred since the 1930’s. Many states have broadened their sales tax base from what it was when first created decades ago and there are ways to transition in changes to alleviate concerns. In addition, emphasizing the benefits of a modernized sales tax system may encourage many taxpayers to embrace change and progress. Constitutional constraints: The constitutional change from the passage of Proposition 163 in 1992 prohibits application of sales tax to most food products. Efforts to reform this large exemption, such as to better target it to low income taxpayers, will require a constitutional change – not an easy thing to do, but not impossible. If voters understand that removal of the constitutional prohibition against taxing food would include legislation that would include a refundable credit for low-income individuals (on a sliding scale depending on income), they would likely see the change as better targeting this exemption that provides a bigger benefit to higher income individuals relative to lower income taxpayers. Concerns about taxing services: Any talk about applying sales tax to services will lead many to raise the past instances in Florida and Massachusetts, and more recently – Michigan, as to why it cannot be done despite the reality that several states successfully tax many types of services. In 1987 and 1990, respectively, Florida and Massachusetts began to tax some services and soon thereafter, repealed that tax. Issues that arose are ones that can be addressed, as evident by the application of taxes on some services in other states today.[xxix] Use tax collection issues: A broadened sales tax base will increase the amount of uncollected use tax. That is, many of the items in a broadened sales tax will be purchased from vendors without a physical presence in California, thus no sales tax will be collected (unless the vendor has voluntarily registered to collect it). However, the California buyer will need to self-assess and pay use tax on the purchase. Use tax collection is weak and a broadened sales tax base will lead to a greater amount of uncollected use tax. Efforts can be made though to address this collection problem.[xxx] Effect on businesses: Businesses that become subject to sales tax collection under a broadened sales tax will need to start filing sales tax returns and implementing accounting systems to enable them to properly assess and collect the tax. The state can help by offering refundable tax credits and training. Concerns are also likely to be raised that the burden of taxing services will fall more on small business than larger ones because larger businesses may start to hire more employees rather than pay sales tax on outside or contracted services. This is unlikely in all cases in that businesses often need certain services on a sporadic schedule or need an independent service provider (such as for accounting or legal services). Another concern likely to be raised is that businesses will find it cheaper to contract for taxable services with providers located outside of California who are not required to collect the sales tax, thus leading to a drop in business for California service providers. However, California taxpayers would still be required to self-assess and pay use tax on such services. In addition, for many of the services, such as theater admission, haircuts, lawn care and veterinary services, taxpayers will not obtain the service from out of state to avoid the sales tax. Effect on local governments: Broadening of the sales tax base accompanied by a rate reduction intended to achieve revenue neutrality, will result in winners and losers among local government. For example, some cities have a strategy of attracting retailers that generate sales tax for the city. A drop in the tax rate may lead to a greater decrease in tax collections from the retailers than will be made up by the taxes collected on items newly subject to the sales tax. This issue can be addressed by gradually expanding the tax base and lowering the rate rather than doing it all at once. Other transitional relief might include measuring city sales tax revenue for the three years preceding the change. If the tax change results in reduced collections of a certain percentage, the city would be compensated from a pool of funds gathered for this purpose. The percent of compensation would be phased out over a few years to give cities time to adjust to sales tax revenue changes. Legal constraints: The California Constitution, Article XIIIA, Section 3 provides: “any changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorum taxes on real property, or sales or transaction taxes on the sales of real property may be imposed.” In addition, to increase revenue from a general tax, a local jurisdiction needs to obtain a majority vote of the group affected by the tax. Also, Article XIIIA, Section 4 provides that cities, counties and special districts may only impose special taxes (except for taxes on real property) if there is a 2/3 majority vote of qualified electors in the jurisdiction. Because the sales tax is both a state and local tax, to broaden the tax base (even perhaps with a rate decrease) a majority vote of the electorate would be needed along with a 2/3 vote of the legislature.
Implementation Recommendations To be viable and effective, the California sales and use tax needs to be brought into the 21st century. One significant change is to address the changed consumption patterns from the 1930’s to today. Broadening the tax base would also enable the high tax rate to be reduced and would also provide opportunities for revenues to address state and local needs, if desired. No doubt, changing the base would be a major change. Other states have acted: California would not be alone in broadening and modernizing its sales tax base. Several states already tax more consumption items than does California and several states are broadening their base to include digital items (particularly where they are substitutes for tangible items, such as music). For example, starting October 2006, New Jersey’s expanded its sales tax base to include more services and “digital property.” One new category of taxable items includes “digital property” defined as “electronically delivered music, ring tones, movies, books, audio and video works and similar products, where the customer is granted a right or license to use, retain or make a copy of such item. Digital property does not include video programming services, including video on demand television services, and broadcasting services, including content to provide such services.” The base was also extended to prewritten software delivered electronically unless used directly and exclusively in the conduct of business.[xxxi] Ways to make base broadening workable: Listed below are some recommendations for implementing changes to the sales and use tax base.
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