California's
Tax Expenditure Programs

Sales and Use Tax Programs--Part 3

Contents

• Factory-Built Housing
• New Mobilehomes
• Used Mobilehomes
• Custom Computer Programs
• California Gold Medallions
• Monetized Bullion, Gold and Silver Bullion, And Numismatic Coins
• Returnable Containers
• Containers Whose Contents are Tax-Exempt
• Original Artworks and Displays For Specified Museums
• Single-Use Mailing Lists
• Sale-Leasebacks Involving Certain Governmental Entities
• Motor Vehicle Fuel Used in Airplanes
• Fuel Sold to Air Common Carriers For International Flights
• Fuel Used in Water Common Carriers
• Meals and Food Products Served in Schools
• Hot Food Products Served To Airplane Passengers
• Meals Served to Patients and Residents of Health Care Facilities
• Meals Provided to Qualified Low-Income Senior Citizens
• Meals Delivered to Elderly and Disabled Individuals
• Meals Prepared in Common Kitchen Facilities For Qualified Senior Citizens
• Meals and Food Products Served by Religious Organizations
• Food Stamp Purchases

Exclusion/Exemption:

Factory-Built Housing

Description

This program exempts from taxation 60 percent of the sales price of qualified factory-built housing. "Factory-built" housing includes such types as modular housing and sectionalized housing. The program does not exempt: (1) mobile homes; (2) precut housing packages where more than 50 percent of the package consists of precut lumber only; (3) panelized construction (such as walls or components that may become one or more rooms of a building) that is not a complete housing package; and (4) porches or awnings not purchased with a complete housing package.

Rationale

This program attempts to equalize the sales and use tax treatment of factory-built housing with that of conventional housing. When a contractor builds a conventional fixed-foun-dation home, he or she normally pays sales and use taxes on the tangible property that becomes a part of the home, such as lumber, paint, and wallboard. The home sale itself, however, is not subject to the sales tax, since the tax is levied on tangible personal property only. Thus, only the value of the home due to the materials embodied in it, is subject to taxation.

This program applies a similar approach to taxing factory-built housing when sold by a manufacturer or dealer. Specifically, data from the industry indicate that about 40 percent of the sales price of modular housing represents the value of materials. Thus, this program excludes from taxation the remaining 60 percent of the sales price not due to materials.

Comments

The Board of Equalization (BOE) Regulation 1521 generally treats the purchase and installation of modular buildings as construction contracts for sales and use tax purposes. Consequently, the manufacturer pays tax on materials, and the purchaser pays tax only on the value of fixtures (such as an air conditioner or stove). According to BOE, the total tax liability under this regulation is similar to the assumed tax liability under the sales and use tax. Therefore, while this program gives statutory weight to this type of treatment, it does not significantly affect tax revenues compared with BOE's regulatory interpretation of general sales and use tax law.

Exclusion/Exemption:

New Mobilehomes

Description

This program exempts from taxation 25 percent of the sales price of a new mobilehome charged by the manufacturer to the retailer, provided that the home is sold by the retailer for installation on a foundation for occupancy as a residence. (The sale of the mobilehome by the retailer to the homeowner is fully tax-exempt.)

Rationale

The rationale for the program is based on the belief that mobilehomes should be treated like conventional housing for tax purposes. This program provides a measure of tax equity between mobilehomes used on a permanent site versus conventional and factory- built housing. It does this by recognizing that a portion of the retail value of both conventional and factory-built housing is exempt from sales and use taxation. Specifically, in the case of qualified factory-built housing, the exemption is equal to 60 percent of the consumer's purchase price. In the case of conventional housing, the difference between a house's selling price and the cost of taxable materials to the builder is not subject to taxation.

Exclusion/Exemption:

Used Mobilehomes

Description

This program exempts from taxation the sale or use of any used mobilehome that is subject to the property tax.

Rationale

This program provides tax relief to the seller of a used mobilehome and to its purchaser to the extent that the reduced tax liability is reflected in lower selling prices. The rationale for the program is to equalize treatment of mobilehomes with that of conventional housing, whose resales are not subject to sales and use taxation.

Comments

Any new mobilehome used as a residence purchased after 1980 is automatically placed on the local property tax roll, and therefore would not be subject to sales tax upon resale.

However, for new mobilehomes purchased prior to 1980, the mobilehome owner may choose whether to treat the mobilehome as property subject to the property tax or as a vehicle. In the latter case, the owner would pay an annual licensing fee, and the buyer would be liable for sales and use tax upon resale of the mobilehome.

Exclusion/Exemption:

Custom Computer Programs

Description

This program exempts from taxation the sale of custom computer programs, other than a basic operational program (including a control program). In addition, a program's documentation manuals and storage media also are exempt from taxation.

Rationale

The rationale for this program is that sales of qualified custom computer programs are primarily service-type transactions and, therefore, not subject to taxation.

Comments

This program was established in 1982 by Chapter 1274, Statutes of 1982 (AB 2932, Vasconcellos). That measure stated it was the Legislature's finding and declaration that the sales of custom programs, other than basic operational programs, are service transactions not subject to any sales and use taxes. The measure further stated that the use of any storage media in the transfer of custom computer programs is only incidental to the true objective of the transaction, which is the performance of a service. As such, the Legislature declared that the measure was declaratory of, and not a change in, existing law.

The resale of a custom computer program is subject to tax, however, because the program was not prepared to the special order of the purchaser (Touche Ross & Co., v. State Board of Equalization, 203 Cal. App.3d 1057, review denied).

Exclusion/Exemption:

California Gold Medallions

Description

This program exempts from taxation the sale or use of commemorative "California Gold" medallions.

Rationale

This program provides an incentive for individuals to purchase commemorative California Gold medallions, by lowering their price.

The program also equalizes the tax treatment of these medallions with that of monetized bullion, nonmonetized bullion, and certain coins and medallions which are exempt (in values of $1,000 or more) under Section 6355 of the Revenue and Taxation Code. Proponents of this program argue that California Gold medallions are comparable to these other items (such as South African Krugerrands), because all can be used as metallic stores of wealth and financial investments.

Comments

This program gives California Gold medallions an advantage over bullion coins (see program entitled "Monetized Bullion, Gold and Silver Bullion, and Numismatic Coins") by exempting all of their sales, not just those for $1,000 or more.

The Department of General Services was required by Chapter 826, Statutes of 1982 (AB 676, Kelley) to design a series of commemorative California gold medallions to which this program applies.

Exclusion/Exemption:

Monetized Bullion, Gold and Silver Bullion, And Numismatic Coins

Description

This program exempts from taxation the sale or use of monetized bullion (coins whose value is essentially the same as that of the metal they contain), nonmonetized gold and silver bullion, and numismatic coins (these have value beyond their metal content due to rarity or aesthetic appeal), including gold medallions struck under the authority of the American Arts Gold Medallion Act. To qualify for the program, individual transactions must have a market value of $1,000 or more.

On or before September 1, 1994, and each year thereafter, the minimum market value used to qualify for the program is to be adjusted for inflation when the sum of the adjustments equals or exceeds $500. The inflation-adjusted amount is to be rounded to the nearest $500.

Rationale

This program provides tax relief to purchasers and sellers of qualifying coins and bullion.

The program is rationalized on two basic grounds. First, many buyers of coins or bullion could avoid California sales tax by making purchases from dealers in other states, either in person or by mail. Although they would be liable for use tax on these purchases in the absence of this program, as a practical matter, the use tax is rarely collected on these types of transactions. Thus, program proponents argue that the actual revenue loss from this program is minor, and that the exemption promotes economic activity in California from coin and bullion sales, as well as enabling buyers to deal with local businesses.

Second, proponents argue that the program increases tax equity by equalizing tax treatment of coins and bullion with competing investment vehicles, such as stocks and real estate, which are not subject to the sales or use tax.

Comments

We reviewed this program in detail in our Report on the 1988-89 Tax Expenditure Budget (Report 88-20, December 1988), pages 71-76. We concluded that, in the absence of this program, most larger sales of bullion (in either monetized or nonmonetized form) would shift to out-of-state dealers, and the state would collect relatively little additional revenue unless changes were made in federal laws that make collection of taxes on these interstate transactions more feasible. However, we recommended repealing the exemption for numismatic coins, because this exemption clearly conflicts with the state's general policy of applying sales and use taxes to other collectibles, such as artworks and jewelry.

Exclusion/Exemption:

Returnable Containers

Description

This program exempts from taxation the transfer of returnable containers, when sold with their contents, or when resold for refilling. A "returnable container" means a container that customarily may be returned by the buyer of the contents for reuse. All other containers are classified nonreturnable containers for the purpose of this program.

Rationale

This program provides tax relief to consumers of products sold in returnable containers by reducing the price of such items. The program's rationale is that the "price" charged for a returnable container often is a deposit, and applying the sales tax on each transaction could result over time in cumulative total sales taxes that eventually might amount to more than the value of the container itself. Thus, the program removes a disincentive to the use of returnable containers, which are viewed as beneficial from a resource conservation and environmental perspective.

Exclusion/Exemption:

Containers Whose Contents are Tax-Exempt

Description

This program exempts from taxation the transfer of filled containers whose contents are not subject to the sales and use tax.

Rationale

This program provides tax relief to consumers of tax-exempt goods that are sold in containers (such as most food products). The program also benefits industries producing containerized packaging by encouraging its use. The main rationale for the program appears to be that it lowers the prices at which food and other tax-exempt goods may be sold to consumers. It also simplifies tax administration by eliminating the need to separately state the container prices.

Comments

This program provides an indirect subsidy to consumers who retain empty containers for subsequent use. Examples of this include the use of plastic milk cartons as water jugs, and plastic butter containers as kitchen food-storage bowls.

Exclusion/Exemption:

Original Artworks and Displays For Specified Museums

Description

This program exempts from taxation the sale or use of original works of art which are purchased (1) by a qualified nonprofit organization, (2) by a state or local government entity, or (3) for donation to a qualified government entity or nonprofit organization. The exemption applies only to art purchased to become a permanent part of the collection of a qualified museum, local government entity, or nonprofit organization.

To qualify, a museum must either: (1) have a significant portion of its space open to the public without charge; (2) be open to the public without charge for not less than six hours per month during any month when the museum is open to the public; or (3) be open to a segment of the student or adult population without charge. For a local government entity to qualify, it must purchase or commission art for public display in buildings, parks, plazas, or other public areas. Such areas must be open to the public at least 20 hours per week for at least 35 weeks of the year. In the case of a nonprofit organization, there are a variety of additional qualifying requirements.

This program also exempts museum pieces purchased for or by the San Diego Aerospace Museum or the California Science Center. The exemption applies only to items which have value as museum pieces. It does not cover display cases, shelving, lamps, or other property used in operation of the museum.

Rationale

This program provides an incentive for individuals or organizations to donate, and for government agencies and nonprofit organizations to acquire, works of art that will be made available to the public to enjoy. It does this to the extent that sales and use taxes on artwork ordinarily would increase the cost of acquiring it. The program's underlying rationale is that art and the displays provided by qualified organizations provide valuable cultural and educational benefits which are worthy of public financial support.

Comments

Separate provisions were established to cover the San Diego Aerospace Museum and the California Science Center, because some of their museum pieces would not necessarily be called "works of art," and thus would not qualify under the artwork exemption. These separate provisions extend the exemption to all of the museum pieces of these two facilities.

Exclusion/Exemption:

Single-Use Mailing Lists

Description

This program exempts mailing lists from the sales and use tax where names and addresses or other information are recorded on magnetic tapes or similar devices, and the contract regarding the mailing list restricts the purchaser to a single use.

Rationale

This program provides tax relief to individuals and institutions who have one-time access to mailing lists. The program is rationalized on administrative grounds, on the basis that the taxes collected from the one-time use of such mailing lists would likely be exceeded by the administrative costs of collection.

Comments

This exemption would typically not apply to corporations who conduct mail-order campaigns, since such activity requires the reuse of mailing lists.

Exclusion/Exemption:

Sale-Leasebacks Involving Certain Governmental Entities

Description

This program exempts from taxation the transfer of certain transportation, pollution control, or alternative energy equipment when these transfers constitute sale-lease-backs or similar arrangements with designated public agencies for financing purposes. The initial purchase of the equipment is not exempt from sales or use tax, however. In order to qualify, the equipment transfer must fall into one of the following categories:

• Transfers of project property to the California Alternative Energy and Advanced Transportation Source Financing Authority, and leases by the authority back to project-participating parties.



• Transfers of pollution control equipment and facilities to the California Pollution Control Financing Authority, and leases by the authority back to project-participating parties.



• Transfers or leases of mass commuting vehicles (such as buses and rail transit cars) between transit operators and parties providing financing under a "safe harbor" lease arrangement under federal tax laws.



• Transfers of commuter vehicles (including railcars and locomotives, bus and van fleets, and ferryboats) by the California Department of Transportation (Caltrans), and leases of these vehicles back to the department under sale-leaseback arrangements authorized by California Government Code Section 14060 et seq.

Rationale

This program provides tax relief to purchasers of alternative energy and pollution control equipment which receive financing assistance from state revenue bond authorities. The program also provides tax relief to transit agencies and Caltrans for transit and commuter vehicles financed through qualifying sale-leaseback arrangements.

The program has two rationales. First, it is argued that alternative energy, pollution control, and transit programs are beneficial to society and, therefore, merit public financial support. The second rationale offered by program supporters is that, because the exempt transactions are not authentic sales or leases but merely "paper" transactions to obtain favorable financing terms, they should not be taxed.

Comments

This program predates enactment of Chapter 558, Statutes of 1990 (AB 3382, Baker), which provides a general exemption from sales and use taxes for property transfers made under qualifying acquisition sale-leaseback arrangements. In the absence of the special programs discussed in this review, many of its specifically exempted transactions probably would qualify for this general exemption (or could be structured to do so). In addition, some transactions exempted under the program might not be deemed by the courts to be taxable sales or leases, even in the absence of both the special and general sale-leaseback exemptions, under the precedent established by Cedars-Sinai Medical Center v. State Board of Equalization (162 Cal. App.3d 1182).

Exclusion/Exemption:

Motor Vehicle Fuel Used in Airplanes

Description

This program exempts from taxation the transfer of qualified motor vehicle fuel used to propel aircraft. (This exemption does not apply to aircraft jet fuel.) To qualify, the fuel must be subject to the motor vehicle fuel tax and not be subject to refund.

Rationale

This program provides tax relief to owners and users of certain aircraft. The rationale for the program relates to the reason why motor vehicle fuel became subject to the sales and use tax in 1972. Prior to that time, such fuel was subject only to motor vehicle fuel excise taxes. In 1972, however, fuel also became subject to sales and use taxation, a portion of which is levied as a means of raising revenues for transportation-related purposes, including support of highways and mass transit. Because air transportation does not benefit from the use of these revenues, motor vehicle fuel used in airplanes remained exempt from sales and use taxation.

Comments

Motor vehicle fuel is subject to full state and local sales and use taxation, a portion of the revenues from which is dedicated to transportation-related purposes. The remaining portion is largely channeled into the state's General Fund for general purposes. The rationale for not taxing motor vehicle fuel for airplane use would not apply to the General Fund portion of the sales and use tax. This portion is exempt for reasons of administrative convenience and simplicity.

Jet aircraft fuel is not subject to the motor vehicle fuel tax. Rather, it is subject to a special aircraft jet fuel tax of 2 cents per gallon.

Exclusion/Exemption:

Fuel Sold to Air Common Carriers For International Flights

Description

This program exempts from taxation the sale and use of fuel and petroleum products used by air common carriers for immediate consumption on an international flight. An international flight is defined as a flight whose final destination is a point outside of the United States.

Any fuel sold to a common carrier for use outside the state after the first out-of-state destination is exempt from taxation regardless of this program, so that the net effect of this program is to exempt fuel used on the "first leg" of an international flight.

Rationale

This program benefits domestic producers of jet fuel, and airlines that have international flights originating in California. It does so by reducing the price of fuel purchased in California for these flights. The program is rationalized on the basis that it equalizes the tax treatment of domestic fuel producers with that of foreign fuel producers. Current federal law prohibits states from taxing imported fuel brought into the state under customs bond and transferred to common carriers for use in foreign commerce. By applying a similar exemption to domestically produced fuel, the program reduces the relative costs of using domestic fuel on flights, making it more competitive with foreign fuel.

Comments

This program was added by Chapter 1227, Statutes of 1988 (SB 1942, Craven), and became operative January 1, 1989, contingent on federal exemption provided in Section 1309 of Title 19 of the United States Code. If the federal prohibition on taxing foreign fuel used in foreign commerce is repealed, this program will also be repealed at the same time.

Opponents of this program argue that, while the federal prohibition on taxing foreign fuel does place domestic fuel producers at a competitive disadvantage, the problem should not be addressed by a California state tax exemption on domestic fuel. Instead, efforts should be made to have the federal prohibition on taxing foreign fuel repealed.

Exclusion/Exemption:

Fuel Used in Water Common Carriers

Description

This program exempts from taxation the sale and use of fuel and petroleum products used by a water common carrier (such as a cruise ship or cargo freighter) after it has reached its first out-of-state destination at which passengers or cargo are loaded or discharged. The taxpayer is required to furnish the seller of fuel or petroleum products an exemption certificate in writing, specifying the quantity of fuel or petroleum products exempt from sales and use taxation. This program sunsets on January 1, 2003.

Rationale

This program benefits domestic producers of fuel and petroleum products sold to water common carriers and interstate water common carriers. It does so by reducing the price of fuel purchased in California for these carriers. The program is rationalized on the basis that the fuel purchased is being used outside of California. Thus, it equalizes its tax treatment with that of other goods purchased in the state solely for use outside of California. In addition, a portion of the sales tax is meant to raise revenues for transportation-related purposes, including highways and mass transit. Because water common carriers do not benefit from the use of these revenues, it can be rationalized that it should not be subject to at least this portion of the sales and use tax.

Exclusion/Exemption:

Meals and Food Products Served in Schools

Description

This program exempts from taxation the transfer of qualified meals and food products that are furnished or served to students in schools (including colleges and universities). In order to qualify for the program, the food must be provided by a public or private school, a school district, a student organization, a parent-teacher organization, or certain blind persons.

Rationale

This program provides tax relief to students who consume meals and food products provided by qualified persons and organizations to the extent that taxes levied on such meals and food products ordinarily would increase their prices. The program's rationale is that proper student nutrition should be encouraged and, therefore, the price of the food should not be increased by taxation. The program is also justified on the grounds that students may not have access to cooking facilities, and this type of meal service may be the only option for such individuals.

Exclusion/Exemption:

Hot Food Products Served To Airplane Passengers

Description

This program exempts from taxation the transfer of hot prepared food which is either (1) sold by caterers and other vendors to airlines for consumption by passengers, or (2) sold or served to passengers by airlines. The program applies to air carriers engaged in interstate or foreign commerce.

Rationale

This program simplifies tax administration by eliminating the need to allocate meals by state on interstate flights between California and other states. The program also provides tax relief to the consumers of food on airplanes. The program's proponents have argued that the exemption is appropriate because providing food service is incidental to an airline's main service, which is to provide air transportation.

According to this argument, air travelers are "captive eaters," having no choice as to whether food products will be made available to them. Accordingly, the cost of the meal is incorporated in the price of the ticket whether or not they choose to consume the food provided. Thus, it is argued that such meals should not be subject to taxation.

Exclusion/Exemption:

Meals Served to Patients and Residents of Health Care Facilities

Description

This program exempts from taxation the sale or use of meals and food products which are served to patients or residents of any of the following (under certain conditions): (1) a health facility, (2) a community care facility, (3) a residential care facility for the elderly, (4) alcohol or drug abuse treatment facilities, or (5) a house or institution providing room and board for the elderly.

Rationale

This program provides tax relief to consumers of meals and food products served at qualified health care facilities, to the extent that sales and use taxes levied on such products ordinarily would be incorporated into the prices charged for them. The underlying rationales for the program are that (1) pro-viding proper nutrition for residents of health care facilities should be encouraged and, therefore, the price of food in such facilities should not be increased by taxation, and (2) residents of these facilities generally do not have the alternative of cooking for themselves.

Exclusion/Exemption:

Meals Provided to Qualified Low-Income Senior Citizens

Description

This program exempts from taxation the sale or use of meals and food products served to low-income elderly persons by a nonprofit organization or governmental agency under a program funded by the state or the U.S. government. To qualify for the program, a meal must be sold at, or below, cost.

Rationale

This program provides tax relief to low-income senior citizens who consume qualified meals. The underlying rationale for the program is that providing proper nutrition to low-income senior citizens should be encouraged and, therefore, the price of food served to qualifying individuals should not be increased by taxation.

Comments

Many meal programs for low-income elderly persons do not charge for the meals, and those meals would not be subject to tax even in the absence of this program.

Exclusion/Exemption:

Meals Delivered to Elderly and Disabled Individuals

Description

This program exempts from taxation the gross receipts from the sale, storage, use, or consumption of meals that are delivered to homebound elderly or disabled persons by a nonprofit volunteer home-delivery meal provider (such as "Meals on Wheels").

Rationale

This program provides tax relief to those individuals that must rely on such services for their meals. Such services provide the proper nutrition to individuals who might otherwise not be able to prepare similar meals for themselves because of their limited mobility. It also encourages nonprofit organizations that may provide such meals at reduced prices to continue doing so.

Exclusion/Exemption:

Meals Prepared in Common Kitchen Facilities For Qualified Senior Citizens

Description

This program exempts from sales and use taxation meals or food products furnished to and consumed by qualified persons 62 years of age or older. The program applies, for example, to food consumed by senior citizens who reside in a condominium and own equal shares in a common kitchen, and for whom food is served on a regular basis.

Rationale

The program provides tax relief to senior citizens living in housing that supplies room and board. The program also equalizes the tax treatment of food served to senior citizens living in independent settings with that of persons living in health care facilities. The underlying rationale for the program is that providing proper nutrition to senior citizens should be encouraged and, therefore, the price of the food served to qualifying individuals should not be increased by taxation.

Exclusion/Exemption:

Meals and Food Products Served by Religious Organizations

Description

This program exempts from taxation qualified meals and food products that are served by a religious organization, or under its auspices. To qualify, the revenue obtained from serving the meal or food must be used in carrying on the functions and activities of the organization. In addition, only those organizations which qualify for the religious property tax exemption may qualify for this program.

Rationale

This program provides tax relief for needy persons who are provided meals at nominal costs by religious organizations. Because the program reduces the price and/or cost of providing a meal to a needy person, the program also encourages qualified organizations to provide such meals. The underlying rationale for this aspect of the program is that providing meals to needy persons is a socially beneficial activity.

Comments

A "qualified" religious organization is defined as one which is exempt from property taxes under Article XIII, Section 3(f) of the California State Constitution. This property tax exemption applies to buildings, land on which they are situated, and equipment, provided they are used exclusively for religious worship.

Exclusion/Exemption:

Food Stamp Purchases

Description

This program exempts from taxation all purchases made with food stamps. When both food stamps and cash are used to purchase goods, the amount of the food stamps is applied to the cost of taxable items first.

Rationale

California enacted this program to comply with the Federal Food Security Act of 1985, which prohibits any state from participating in the Food Stamp Program if that state taxes food stamp purchases.

California generally exempts food products from the sales and use tax, but some food purchases allowed under the food stamp program are not covered under California's general food exemption (such as carbonated sodas). Thus, a separate provision was needed to exempt such items when purchased with food stamps.

Comments

This program will be repealed automatically if and when the federal government passes legislation which repeals the prohibition on state sales taxation of food stamp purchases.

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