Legislative Analyst's Office, February 1999

California's
Tax Expenditure Programs

Sales and Use Tax Programs--Part 2


Contents





Exclusion/Exemption:

Specified Medical-Related Products

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6369.1, 6369.2, and 6369.5.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the sale and use of the following medical-related products for personal use as directed by a physician: (1) wheelchairs, crutches, canes (including white canes for the blind), and walkers (including their replacement parts); (2) medical oxygen delivery systems; (3) hemodialysis equipment supplied by prescription; and (4) containers used to collect or store human blood.

Rationale

This program provides tax relief to consumers of specified medical-related products. The underlying rationale for the program is that such products are items of necessity to individuals who purchase them, and that their cost, therefore, should not be increased by taxation.

Comments

Qualifying "medical oxygen delivery systems" include, but are not limited to, liquid oxygen containers, high pressure cylinders and regulators, when sold, leased, or rented to an individual for personal use under the direction of a physician. This program raises certain issues relating to tax equity and consistent tax-law treatment, since items such as corrective eyewear and auditory devices are not exempt from taxation, yet are used to treat medical conditions.


Exclusion/Exemption:

Medical Identification Tags

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6371.

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program exempts from taxation the transfer of medical identification tags furnished by a qualified nonprofit organization. The term "medical identification tags" includes any tag worn by a person for the purpose of identifying the wearer as having a medical disability or allergic reaction to certain medical treatments.

Rationale

This program provides tax relief to individuals who need to wear medical information tags because of health-related problems. The rationale for the program is that the prices of such tags should not be increased by taxation, because the tags are a necessity for many individuals with serious health problems.

Comments

This program was originally sponsored by the Medic Alert Foundation, a charitable border nonprofit corporation engaged in gathering, storing, and furnishing information regarding the medical problems of members. When an individual subscribes to the Medic Alert Foundation, he or she has the option of purchasing either a bracelet or a necklace on which relevant medical emergency information is engraved. Such products also are available from various other similar types of organizations.


Exclusion/Exemption:

Specified Medical Health Information

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6408.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the use of medical health information literature purchased by qualified organizations. Such qualifying organizations must be formed and operated for charitable border purposes, be eligible for the welfare exemption (a local property tax exemption available to nonprofit, charitable border organizations), and be engaged in the dissemination of medical health information. In addition, the purchase of qualified literature must be made from the organization's national office or another branch of the national office of the same organization. The original purchase of these materials, from a printer for example, is not covered by the exemption.

Rationale

This program provides tax relief for organizations providing educational health information, and thereby enables these organizations to use their limited resources more effectively for educational purposes. The underlying rationale for the program is that the dissemination of medical health information is socially beneficial.

Comments

The original proponent of this program was the American Heart Association. Prior to the inception of this program, sales and use taxes were levied on the medical information that the association distributed to its regional and local chapter affiliates.


Exclusion/Exemption:

Health and Safety Insignia and Educational Materials

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6409.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the transfer of health and safety insignia and educational materials routinely sold in connection with health, safety, and first aid classes. The program requires the insignia and materials to be sold or purchased by a national charitable border organization which qualifies for the welfare exemption (a local property tax exemption available to nonprofit, charitable border organizations). In addition, the materials must be purchased from the organization's national office or another branch or chapter of the national office of that organization.

Rationale

This program offers tax relief to organizations providing specified health-related and safety- related materials and educational information, and for individuals who might purchase them. Thus, the program encourages the wider dissemination of these materials and information. The rationale for the program is that such materials and information are socially beneficial and worthy of public financial support.


Exclusion/Exemption:

Food Animal Medicines

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6358 (e).

(In Millions)
Fiscal Year Amount
1996-97 $2
1997-98 4
1998-99 4

Description

This program exempts from taxation the sale or use of drugs or medicines for which the primary purpose is the prevention and/or control of disease in animal life that ordinarily constitutes food for human consumption.

Rationale

This program provides tax relief to consumers of medical products used on animal life that is used to produce animal food products consumed by humans. This follows the general rationale that food products are a basic necessity of life, and their prices should not be increased by taxation.


Exclusion/Exemption:

Medicated Feed and Drinking Water

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6358.4.

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program exempts from taxation the gross receipts from the sale, storage, consumption, or use of drugs or medicines administered to animal life as an additive to feed or drinking water. The primary purpose of the additive must be prevention and control of disease in food animals or nonfood animals which are sold in the regular course of business.

Rationale

This program provides two types of tax relief. In the case of food animals, it provides tax relief to consumers of animal-based food products. This may be viewed as an extension of the general sales tax exemption for food products, which is based on the rationale that food is a basic necessity of human life and its price should not be increased by taxation.

The rationale for providing an exemption for medicines and drugs used to treat nonfood animals is that the cost of such treatment is incorporated in the price of these animals, which is subject to taxation. Thus, it is argued, taxing it separately would result in double taxation.


Exclusion/Exemption:

Printers' Aids

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6010.3.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the fabrication or transfer of composed type or reproduction proofs, which are made by a typographer for the preparation of printed matter. In addition, this program exempts from taxation the fabrication of reproduction proofs or impressed mats when the materials are transferred to a printer or publisher for use in printing.

Rationale

This program provides tax relief to the printing industry assuming sales and use taxes on transfers of qualified printers' aids normally would be borne by printers. Traditionally, printers' aids often became the property of the customer, so that they were subject to sales tax. These intermediate products of the printing process, however, were used to make final printing materials, which also were taxed upon their sale. This program thus reduces the degree of this sales tax "pyramiding" for the printing industry. It also tends to equalize tax treatment for printers' aids, regardless of the specific arrangements made regarding the transfer of printers' aids.

Comments

Many other industries are subject to tax pyramiding, but the printing industry has argued that it was particularly hard hit by the multiple application of the sales and use tax. Newer computerized printing and publishing methods produce few, if any, intermediate printer's aids, so that the revenue loss from this program should decrease over time.


Exclusion/Exemption:

Partnership Property Used to Produce Motion Pictures

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6010.4.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the use of property rented, leased, or otherwise furnished by a partnership to its members for the production of motion pictures under certain circumstances. In order to qualify for the program, the partnership must be formed by parties engaged in the production or distribution of motion pictures in order to reduce production costs, by sharing equipment, studio facilities, and personnel. The exemption does not apply, however, if the partnership transfers title of any property to its members. In addition, the program does not exempt from taxation the original purchase of property by the partnership.

Rationale

This program provides benefits to some segments of the motion picture industry by reducing the costs they incur for using shared movie-making equipment and fabrication labor. It is rationalized on the grounds that it tends to equalize the taxation of equipment and fabrication labor provided "in-house" (say, in a vertically integrated movie company) with the taxation of these items when several studios or independent producers share these resources. The program thus removes a tax advantage that otherwise would benefit integrated studios (firms which are involved in the full range of movie-making activities) versus other motion picture producers.

Comments

The basic structure of the sales and use tax inherently benefits businesses that are vertically integrated. This is because intracompany transfers of equipment and supplies are not considered a sale and, thus, are not taxed. This program extends an equivalent benefit to nonvertically integrated operations in this particular industry.


Exclusion/Exemption:

Newspapers and Periodicals, Distributed Free of Charge or by Subscription

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6362.3, 6362.7, and 6362.8.

(In Millions)
Fiscal Year Amount
1996-97 $68
1997-98 72
1998-99 74

Description

This program exempts from taxation the sale or use of certain newspapers, periodicals, and any tangible personal property that becomes an ingredient or component of them. The exemption is available provided that a newspaper or periodical is regularly published (at least four times a year). In addition, the item must be: (1) distributed free of charge; or (2) sold by subscription and delivered by mail or common carrier; or (3) purchased or published by an organization that qualifies for tax-exempt status under Internal Revenue Code Section 501(c)(3) and meets certain other requirements. The exemption also applies to any newspaper or periodical that is sold by subscription pursuant to an agreement entered into and for which prepayment was received prior to July 15, 1991.

The term "periodical" is defined as meeting certain stated publication intervals during a year, with each issue bearing some relation to the previous issues. It does not include printed sales messages, shopping guides, or publications where advertising exceeds 90 percent of the printed area of an issue in more than one-half the issues published in a 12-month period.

Rationale

This program provides tax relief to the publishers of qualified newspapers and periodicals, and to the consumers of these items. Proponents of this program contend that the contents of a newspaper or periodical are akin to an information service and, thus, the transfer of a newspaper or periodical is equivalent to the sale of a service. Because the transfer of services is generally exempt from sales and use taxation, these proponents thus argue that the transfer of other newspapers and periodicals also should be exempt.

Comments

Generally, paid newspaper subscriptions are subject to taxation, since the publishers of such newspapers have "nexus," or sufficient economic presence in California for tax purposes. Some newspapers published out-of-state, however, have insufficient presence in California to trigger the levying of the sales and use tax.


Exclusion/Exemption:

Leases of Motion Pictures

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6006 (g)(1) and 6010 (e)(1).

(In Millions)
Fiscal Year Amount
1996-97 $29
1997-98 31
1998-99 32

Description

This program exempts from taxation the qualified lease or rental of motion pictures (including animated motion pictures), television films, and tapes (except video rentals for private use).

Rationale

This program provides tax relief to the owners and users of motion pictures and television shows. The apparent rationale for the program is to encourage expansion of the market for motion pictures and tapes in California by reducing the cost of leasing such pictures, and thereby promoting the economic health of the motion picture industry. Proponents of the exemption also argue that it is needed to provide tax equity between exhibitors of motion pictures and tapes versus other forms of entertainment, such as live theater, that are not subject to the sales and use tax. There are, however, many forms of entertainment which are subject to sales and use taxes, such as videocassette rentals, books, and games.

Comments

The estimated revenue reduction amounts shown above are based only on leases to movie theaters in California, because these transactions involve the transfer of a physical copy of the movie. Television programming, on the other hand, can be and often is transferred via satellite or phone lines. Thus it would not be subject to taxation, even in the absence of this program. Consequently, the additional revenues that would be realized from taxing leases of television programming would be relatively small.



Exclusion/Exemption:

Master Tapes and Master Records

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6362.5.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation qualifying transfers of master tapes and master records that are used by the recording industry in making sound recordings. The sales tax does apply, however, to purchases of the tangible elements of such master tapes and recordings (for example, the cost of the blank tape) when these are acquired from a recording studio by a tape or recording producer.

Rationale

This program provides tax relief to the consumers of master tapes and records by reducing the prices of these items. At the time this program was enacted, it was rationalized on the basis that the value of a master tape or record was primarily attributable border to the intangible element of the music or other information stored on the tangible medium. The proponents of this exemption argued that it was not proper for the state to tax the value of such intangible elements.

Comments

In 1988, the California Court of Appeals held that in certain circumstances the sale or lease of master tapes and records are not exempt from taxation. Specifically, in A&M Records, Inc. v. State Board of Equalization (1988 [204 Cal. App. 3d 358]), the court determined that the contract to purchase master tapes or records used for producing additional master recordings or copies was a taxable transaction. The court held, in this case, that the true object of the contract was for the production of such duplicates and not for the services of the artist.


Exclusion/Exemption:

Printed Advertising Materials

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6379.5.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the sale or use of catalogs, letters, circulars, brochures, and pamphlets consisting substantially of printed advertisements for goods and services. To qualify, these materials must be (1) printed to the special order of the purchaser and (2) mailed or delivered by the seller, seller's agent, or a mailing house through the United States Postal Service, or by common carrier to another person, at no cost to the recipient.

Rationale

This program provides tax relief to California printers and retailers. The rationale for the program is to provide tax equity for California printers. When a California retailer contracts with an out-of-state printer to print its advertising, the printing job is not subject to sales tax. In the absence of this program, a similar contract with a California printer would be subject to sales tax. Program proponents argue that the program is necessary to make California printers competitive with out-of-state printers.

Comments

This program was established by Chapter 1515, Statutes of 1986 (SB 2527, Robbins), and took effect on January 1, 1987. An alternative way to provide tax equity for California printers in the absence of this program would be to apply the use tax to printed advertising materials purchased from out-of-state printers by California firms. In cases where the out-of-state printer sends the advertising material directly to California recipients, there had been concern that imposing the use tax would unconstitutionally interfere with interstate commerce. That concern appears to have been erased by a 1988 decision of the U.S. Supreme Court (D.H. Holmes Co. v. McNamara, 48 U.S. 24, 100L Ed 2d 21, 108 S Ct 1619). In that case, the court unanimously upheld Louisiana's imposition of use tax on catalogs printed outside the state for a Louisiana retailer and delivered directly to prospective customers in Louisiana.



It is estimated that the total value of all catalog, directory, and printed advertising products generated for use in California is in the billions of dollars. If all such products were subject to taxation, the sales tax liabilities could be several hundred million dollars. However, this figure dramatically overstates the revenue loss to the state due to this program, for two reasons. First, an unknown number of these products are already subject to taxation. For example, catalogs that are sold to consumers are taxed, as are many other advertising materials. Second, an unknown portion of these products would not be subject to taxation, even if this program were repealed. For example, according to the Board of Equalization, advertising inserts in many newspapers would continue to be exempt from taxation under the exemption for newspapers and periodicals.


Exclusion/Exemption:

Motion Pictures and Production Services

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6010.6.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation charges for qualified production services (so-called "fabrication labor") used in the production of a motion picture (including videos, or any other commercial audiovisual works). These services include the production of special effects, animation, music, sound, editing, and photography, regardless of whether the service is performed under the producer's supervision or done independently. The exemption does not include the production of duplicate tapes for exhibition or broadcast, or release prints.



Additionally, the program exempts transfers of all or part of qualifying motion pictures, or any interest or rights to them (including partially finished work and intermediary materials). To qualify, the motion picture must either be (1) sold before it is first exhibited or broadcast to its general audience, or (2) transferred to any persons holding exploitation rights which they gained prior to the first exhibition.



These exemptions do not apply to (1) the transfer of raw film or videotape stock, (2) the transfer of release prints or tapes for exhibition or broadcast, or (3) rentals or leases of videocassettes, videotapes, or videodiscs for private use. The term "qualified motion picture" does not include motion pictures produced for private noncommercial use, such as weddings or graduations.

Rationale

This program has several rationales. First, it provides an incentive for retaining motion picture production activities in California by reducing the industry's tax burden.



A second rationale is that the program simplifies tax administration. Before this program was established, the taxability of charges for special effects and other production services depended on whether these services were performed by studio employees or contractors supervised by the producer (in which case they were not taxable) versus by contractors operating independently (in which case they were taxable). Taxation was complex because it often was difficult to distinguish among the various contractual relationships involved.



A third program rationale is to create tax equity between studio employees and contractors who perform the same kinds of work, as well as tax equity between integrated producers that produce a finished work and those that specialize in one segment of the work, such as filming or postproduction editing.

Comments

Fabrication Labor. Although services themselves generally are not subject to the sales and use tax, fabrication labor used to make an item of tangible property generally is subject to tax. For example, charges by a tailor to make a suit are taxable even if the customer provides the cloth. This treatment provides tax equity between custom-made products and off-the-shelf products. However, there is no tax on fabrication labor if it is provided by employees of the same company that uses the finished product (since no sale or transfer of property occurs), or, in many cases, if the labor is performed under the supervision, and subject to the approval of the customer.



As regards the activities affected by this program, the creation of special effects for motion pictures usually involves the production of tangible property (a film or video product) that is an intermediary product used to incorporate the special effect into the final motion picture. In the absence of this program, the sale of that intermediate product to a producer by a contractor who is not supervised by that producer generally would be taxable.



Sales of Motion Pictures. Sales of completed motion pictures prior to their commercial exhibition are considered a sale for resale and would not be taxable, even in the absence of this program. In contrast, sales of rough footage or other intermediary products for a motion picture in progress generally would be taxable in the absence of this program.


Exclusion/Exemption:

Mobile Transportation Equipment Leases

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6006 (g)(4), 6010 (e)(4), and 6023.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the lease of certain mobile transportation equipment used in the transportation of persons or property. Qualifying equipment includes railroad cars and locomotives, buses, trucks, truck tractors, truck trailers, dollies, bogies, chassis, reusable cargo containers, aircraft, ships, and tangible personal property which is or becomes a component part of such equipment. Equipment which does not qualify for the program includes one-way rental vehicles, passenger vehicles, and trailers and baggage containers designed to be hauled by passenger vehicles. The purchase of mobile transportation equipment by the lessor, however, is generally subject to sales and use tax.

Rationale

This program provides tax relief to users of qualifying transportation equipment by reducing its price. According to the Board of Equalization, the program has several rationales. One involves the administrative complexities of determining the portion of leasing payments that is related to interstate commerce activities, which are exempt from taxation. Another relates to the difficulty of separating out the portion of lease payments associated with the provision of related services, such as maintenance, which are non-taxable.

Comments

Existing law allows lessors of mobile transportation equipment to elect to pay tax on lease receipts, rather than on the equipment's cost at the time of purchase. However, this option is available only to lessors who make no use of the equipment other than renting or leasing it.




Exclusion/Exemption:

Vessels That Transport Over 1,000 Tons

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales Tax.

Authorization: California Revenue and Taxation Code Section 6356.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the sales tax the sale of certain vessels sold by their builder. In order for the program to apply, the vessel involved must be capable of transporting cargoes of more than 1,000 tons. The program does not, however, exempt such vessels from the use tax.

Rationale

The program was originally intended to eliminate a tax "penalty" for purchases of vessels within the state by equalizing their taxation with those purchased outside the state but used within it. At the time this program was enacted, it was thought that the purchase of a vessel from an out-of-state builder for use within the state could not be taxed by the State of California, due to limitations under the U.S. Constitution involving state taxation of interstate commerce.

Comments

The program's original rationale was superseded by a 1942 federal court ruling involving the taxability of vessel purchases. Specifically, in the case of Los Angeles Lumber Products v. State Board of Equalization (45 Fed. Supp. 77), the court ruled that the U.S. Constitution does not prohibit a ship purchased out of state for in-state use from being taxed by California. Thus, the use tax applies to ships purchased out-of-state and used in California unless the operators qualify for other use tax exemptions (see program entitled "Qualified Watercraft and Their Component Parts.")


Exclusion/Exemption:

Vehicles Modified for Physically Handicapped Persons

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6369.4.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the sale and use of items and materials used to modify vehicles for physically handicapped persons. In the event of the sale of such a vehicle to a qualified purchaser, the program also exempts from taxation the portion of the sales price of a vehicle attributable border to handicapped modifications. In order to qualify, the vehicle purchaser must be eligible for a disabled license plate or placard for disabled parking.



Rationale

This program provides tax relief to physically handicapped persons who must rely on specially modified vehicles, such as those with wheelchair lifts and special steering devices. The underlying rationale for the program is that access to vehicles with special modifications is a necessity for many handicapped persons, and one that can impose financial burdens on them since their income-earning potential often is restricted.


Exclusion/Exemption:

New or Remanufactured Trucks and Trailers For Out-of-State Use

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6388 and 6388.5.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from taxation the sale or use of new or remanufactured trucks, truck tractors, trailers, semitrailers, trailer coaches (any of which has an unladen weight equal to or exceeding 6,000 pounds), or auxiliary dollies purchased in California for use outside the state or in interstate or foreign commerce.



All of the above types of vehicles and equipment qualify for the tax exemption if the vehicle is: (1) purchased by an out-of-state resident from an out-of-state dealer, (2) delivered by the manufacturer to the purchaser within California, (3) taken out of the state within 30 days, and (4) registered in another state. These qualifications must be furnished in writing to the manufacturer or remanufacturer.



A somewhat broader exemption applies only to trailers and semitrailers. These vehicles may be purchased from either an in-state or out-of-state dealer, and they may be delivered by either the manufacturer, remanufacturer, or dealer within California. The exemption applies if they are (1) purchased for out-of-state use or for interstate or foreign commerce, (2) taken out of the state within a specified time period, and (3) registered in another state. If the trailer or semitrailer is manufactured out-of-state, the purchaser has 30 days to take it out of California. If the vehicle is manufactured in California, the purchaser has 75 days to remove it from the state. The purchaser does not have to be an out-of-state resident.

Rationale

This program benefits California manufacturers of trucks and trailers, and California dealers who sell trailers and semitrailers. In the absence of this program, purchases of qualifying equipment for out-of-state use from California manufacturers or from California dealers (for trailers and semitrailers) could be subject to the sales or use tax if delivery were to be taken at the manufacturer's or dealer's California location. Proponents argue that such a tax would discourage these purchases.



One rationale of the program is that it ensures that purchases for out-of-state use are not taxed. A second rationale for the program is that it stimulates the California trailer- coach manufacturing and remanufacturing industry.

Comments

By making delivery outside California, the manufacturer or dealer could arrange to avoid any California sales or use tax liability on the transaction, even in the absence of this program. This is because the transaction would be classified as an interstate sale, which is not taxable. Given this, the actual revenue loss due to this exemption probably is relatively small. The primary effect of the program is to facilitate sales by California truck and trailer manufacturers and dealers, and to reduce their costs of delivering vehicles.


Exclusion/Exemption:

Property Used in Space Flights

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Section 6380.

(In Millions)
Fiscal Year Amount
1996-97 $7
1997-98 8
1998-99 12

Description

This program exempts from taxation the sale or use of qualified property used in space flights originating in the state. Qualified property includes: (1) property that has space flight capabilities including orbital space facilities, satellites, and space vehicles; (2) property used aboard any space facility, vehicle, satellite, system, or station; and (3) fuel sold exclusively for space flight. This program still applies in the event of a failure, postponement, or cancellation of a launch of the qualified space property.

Rationale

This program provides a tax incentive for the use of facilities located in California as the origin of space flights versus other similarly equipped facilities in other states. The program also conforms to general sales and use tax policy with respect to purchases of goods used exclusively outside of California.

Comments

Pursuant to Chapter 323, Statutes of 1998 (AB 2798, Machado), this program was expanded to include equipment and property purchases related to all space flight activity in the state. Formerly, the program was applicable only to space flights originating at Vandenberg Air Force Base. The sunset date of January 1, 2004 was also eliminated through this legislation, extending the program indefinitely.


Exclusion/Exemption:

Aircraft Repair and Related Equipment

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6366 and 6366.1.

(In Millions)
Fiscal Year Amount
1996-97 $11
1997-98 16
1998-99 16

Description

This program exempts from taxation the sale or use of tangible personal property purchased after October 1, 1996 that is used as a component part of specified commercial aircraft as a result of maintenance, repair, overhaul, or improvement. Qualifying aircraft must be used for business either as a common carrier or outside of California.

Rationale

This program allows California aircraft maintenance and repair businesses to reduce the prices at which their products are provided, thereby making this industry more competitive with those in other states. This program also equalizes tax treatment for this industry with the railroad industry (which also has its own sales and use tax exemption for equipment used in maintaining or repairing railroads). This is important to the extent that the two industries compete as common carriers

Comments

California is one of many states that has a sales and use tax exemption for aircraft repair equipment. The program thus prevents California from being placed at a competitive disadvantage with respect to airline hub activities.


Exclusion/Exemption:

Railroad and Related Equipment

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6368.5 and 6411.

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program exempts from taxation the sale or use of tangible personal property used as a component part of qualified railroad equipment in the course of repairing, cleaning, altering, or improving that equipment outside of California. Qualifying railroad equipment includes locomotives and passenger cars and maintenance equipment used by or leased to a common carrier engaged in interstate or foreign commerce.

Rationale

This program allows California railroad maintenance and repair businesses to reduce the prices at which their products are provided, thereby making this industry more competitive with those in other states or countries. Because the equipment involved is installed in railroads engaged in interstate or foreign commerce, it often can be purchased in other states or countries. Exempting the equipment from the California sales and use tax allows businesses to reduce the prices on the equipment sold, thus making it more competitive with other states or countries. This program also attempts to equalize tax treatment between the railroad industry and the airline industry (which also has a sales and use tax exemption for equipment used in maintaining or repairing aircraft). This would be important to the extent that the two industries compete as common carriers.

Comments

Although this program makes an attempt at equalizing tax treatment for competing industries, the most direct competition with railroads in the transportation of goods across state lines is the trucking industry. Since the trucking industry does not benefit from a similar program, this program would appear to grant advantageous tax treatment to the railroad industry.


Exclusion/Exemption:

Leases of Specified Linens

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6006 (g) (2) and 6010 (e) (2).

(In Millions)
Fiscal Year Amount
1996-97 $40
1997-98 42
1998-99 44

Description

This program exempts from taxation the sale and use of linen supplies and similar articles. To qualify for the program, these supplies and articles must be provided under a lease agreement that includes recurring laundering and cleaning services. Linens exempt under this program are taxable at the time of purchase by the lessor.

Rationale

This program gives tax relief to providers and consumers of leased linen. Its apparent rationale is that most of the price charged for linen supplies represents the cost of the laundering and cleaning services, which would be exempt if provided separately.

Comments

Generally, lessors have the option of paying sales and use tax on their original purchase price or on their lease receipts. Consequently, this program allows taxation of leased linen on the basis of its original purchase price.




Exclusion/Exemption:

Leases of Household Furnishings

Program Characteristics Estimated Revenue Reduction
Tax Type: Sales and Use Tax.

Authorization: California Revenue and Taxation Code Sections 6006 (g) (3) and 6010 (e) (3).

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program exempts from taxation the lease of household furnishings, when the furnishings are leased along with a lease of the living quarters in which they are to be used. The furnishings are taxable, however, at the time of purchase by the lessor.

Rationale

According to the Board of Equalization, this program exists to facilitate tax administration. Taxing the rental of furnishings in living quarters would require registering and auditing landlords, who generally are not sellers of any other taxable goods. Also, it would be difficult to determine what portion of the rent is for the furnishings.

Comments

Generally, landlords pay tax when they purchase furniture, and would not be taxed on their furniture rental receipts, even in the absence of this program. This is because of the broader provision that allows lessors to choose whether to pay tax on their original purchase amount or on their lease or rental receipts. The program equalizes tax treatment between landlords that buy furniture to rent, versus furniture leased out by a rental company.


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