STATEWIDE LOCAL SALES TAX AND USE TAX

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1 LOCAL SALES TAX TRENDS Demographics..Technology.. And Giving it Away League of California Cities Revenue and Taxation Policy Committee January 16, 2015 STATEWIDE LOCAL SALES TAX AND USE TAX $135 $6,000,000,000 $125 $5,500,000,000 $5,000,000,000 $115 $4,500,000,000 $105 $4,000,000,000 $95 $3,500,000,000 $ Adjusted Per Capita Local SUT (HdL) $3,000,000,000

2 Changing Demographics Aging Population 20% of State over 65 by More for services, less on taxable goods. Millennials (Generation Y) - less materialistic. Lower Financial Expectations. Prefers Education and Social Networking over stuff. Traders, Borrowers, Renters, Recyclers. Masters of the Collaborative Economy. Teenagers (Generation Z) - What is a Mall? Shift in spending Capacities and Priorities Wages for 90% of population stagnant or declining. Costs of non-taxable necessities rising.food....housing healthcare..education. Discretionary income spent on social networking...monthly internet and cellphone fees.

3 Technology Reducing Taxable Sales Digitally transferred goods not considered as tangible personal property books, music, movies, etc. Manufacturing technology reducing costs of goods..apparel, autos, electronics. Litigation expanding definition of non-taxable goods Lucent Technologies Nortel Networks Internet research capabilities forcing prices downward. CONSTANT NARROWING OF THE BASE WITH MORE EXEMPTIONS ADMISSION CHARGES FOOD STAMP PURCHASES MOTOR VEHICLE FEES & TAXES SALE & LEASEBACK ARRANGE AIRCRAFT LEASES (FOREIGN) FOREIGN GOVERNMENTS MUSEUMS SALES FOR RESALE AIRCRAFT SALES (FOREIGN) FRIENDS OF LIBRARY NEW MOBILE HOMES SAN DIEGO AEROSPACE MUSEUM ALTERATION OF GARMENTS FUEL - ORGANIC NEW TRAILERS SCHOOL YEARBOOKS ALTERNATE ENERGY PROJECT FUEL AIR COMMON CARRIERS NEW VEHICLES FOREIGN RES SECURITIES ANIMAL LIFE, FEED, SEEDS FUNGIBLE GOODS NEW VEHICLES OUT OF STATE SERVICES ART TRANSFERS (ENTERTAINMENT) GAS, ELECTRICITY, WATER, STEAM NEWSPAPERS/PERIODICALS SPACE FLIGHT PROPERTY ART WORKS GROUND CONTROL STATIONS NONPROFIT KID S CLOTHES STATE GOVERNMENTS AUXILIARY SVCS TO MUSEUMS HAY PRODUCERS NONPROFIT - AUCTION STORAGE & USE BLOOD STORAGE UNITS HEALTH/SAFETY MATERIALS NONPROFIT - HANDCRAFTED STUDENT MEALS BRACELETS - POW HOT FOOD AIR CARRIERS NONPROFIT THRIFT STORE TAX-PAID PURCHASES RESOLD BUDDY POPPIES ICE OR DRY ICE NONPROFIT VETERANS ORG TELEPHONE LINES/POLES CA GOLD MEDALLIONS INDIAN TRIBAL TAXES NONPROFIT VETERAN MEALS TELEPRODUCTION EQUIP CA SCIENCE CENTER INSTALLATION LABOR OCCASIONAL SALE - BUSINESS TIMBER HARVESTING EQUIP CARBON DIOXIDE INTANGIBLE PERSONAL PROP OCCASIONAL SALES TRAILERS NEW OR USED CASH DISCOUNTS INTERSTATE/FOREIGM COMMERCE OXYGEN DELIVERIES TRANSPORTATION CHARGES CHARITABLE ORGANIZATIONS LEASE OF MOTION PICTURES PARENT-TEACHER ASSOC. TRANSPORTATION OF LANDFILL COGENERATION TECHNOLOGY LEASE, CERTAIN PROP EXCLUDED PARENT COOP NURSERY SCH TRAVEL ACCOMODATIONS COMMON CARRIERS LEASES OF MOBILE TRANS EQUIP PASSENGER VEHICLES UNITED STATES SALES COMPONENTS RAILROAD LEASES OF MOBILE HOMES PERIODICALS USE OF PROPTY HELD FOR SALE CONSTRUCTION OUTSIDE CA LEASES OF OCCASION. SALE PROP PET ADOPTION USED FLOATING HOMES CONSUMER COOPERATIVES LEASES PROPERTY TAX PAID POLLUTION CONTROL USED MOBILE HOMES CONTAINERS LOANS TO CUSTOMERS POULTRY LITTER VEHICLE MODS - HANDICAPPED CREDIT TAX TO OTHER STATES LOCAL TAXES PRESCRIPTION MEDS VEHICLES LOANED TO NIVERSITY CUSTOM COMPUTER PROGRAMS LODGING PRINTED SALES MATERIAL VEHICLES PURCHASED OUT OF A DELIVERY TO EXPORT PACKERS MAILING LISTS PRINTING MATERIALS VEHICLES SOLD TO FAMILY DEMONSTRATION AND DISPLAY MASS COMMUTING VEHICLES PROFESSIONAL HEALTH SVCS VEHICLES SOLD TO FOREIGN RES DIESEL AND USE FUEL TAX MASTER RECORDS & TAPES PROPERTY LOANED EDUC VEHICLES SOLD TO LESSEE DIESEL FUEL FARM & FOOD PROC MEALS TO ELDERLY/DISABLED PUBLIC PASSENGER VEHIC VEHICLES SAME OWNER DONATIONS MEALS BY INSTITUTIONS PURCHASES FOREIGN CTRY VENDING MACHINE SALES ENDANGERED ANIMALS/PLANTS MEALS, ELDERLY CONDO PURCHASES FROM UNITED STS VENDING MACHINE SALES - FOOD EXCISE TAX ON FUEL MEALS, LOW INCOME ELDERLY RACEHORSE BREEDING VESSELS FACTORY BUILT HOUSING MEDICAL ID TAGS RAIL FREIGHT CARS VETERINARIANS FACTORY BUILT SCHOOL BLDGS MEDICAL HEALTH INFORMATION REAL PROPERTY WATER COMMON CARRIERS FARM EQUIPMENT MEDICATED FEED & WATER RELIGIOUS ORGANIZATIONS WATERCRAFT FEDERAL EXCISE TAXES MONETIZED/NON BULLION & COINS RENTAL RECEIPTS OUT OF CA WHEELCHAIRS & WALKERS FINANCE CHARGES MOTION PICTURE PROD PARTNERS RENTAL HOUSE FURNITURE WORTHLESS ACCOUNTS FOOD PRODUCTS MOTION PICTURE PROD SVCS RENTAL LINEN SUPPLIES YOUTH ORGANIZATIONS FOOD VENDING MACHINES MOTOR VEHICLE FUEL RETURNED MERCHANDISE

4 Percentage Growth in E-Commerce Sales versus Total Retail Sales (Billions of Dollars) 1,400 1,260 1,120 Retail Sales E-commerce Source: U.S. Census Bureau (p)=preliminary Estimate CITIES WITH TRANSACTIONS TAX DISTRICTS 2004 Avalon (Hospital) Calexico (Hospital) Clearlake Clovis Placerville Sebastopol Truckee West Sacramento Willits Woodland

5 CITIES WITH TRANSACTIONS TAX DISTRICTS November 2014 Albany Corte Madera Grover Beach Marina Placerville San Leandro South Lake Tahoe Anderson Cotati Guadalupe Merced Point Arena San Luis Obispo Stanton Antoich Culver City Gustine Montclair Port Hueneme San Mateo Stockton Arcata Davis Half Moon Bay Moraga Porterville San Pablo Tracy Arroyo Grande Del Rey Oaks Hayward Morro Bay Rancho Cordova San Rafael Trinidad Arvin Delano Healdsburg Mount Shasta Red Bluff Sand City Truckee Atascadero Dinuba Hercules National City Reedley Sanger Tulare Atwater Dunsmuir Hollister Nevada City Richmond Santa Cruz Ukiah Avalon El Cajon Huron Novato Ridgecrest Santa Maria Union City Benicia El Cerrito Inglewood Oakdale Rio Dell Santa Monica Vacaville Calexico El Monte King City Orinda Rio Vista Santa Rosa Vallejo Campbell Eureka La Habra Oxnard Rohnert Park Scotts Valley Visalia Capitola Fairfax La Mesa Pacific Grove Sacramento Seaside Vista Carmel Fairfield La Mirada Palm Springs Salinas Sebastopol Watsonville Cathedral City Farmersville Lakeport Paradise Sausalito Selma Weed Ceres Fort Bragg Larkspur Paso Robles San Anselmo Soledad West Sacramento Clearlake Galt Lathrop Pico Rivera San Bernardino Sonoma Wheatland Clovis Gonzales Los Banos Pinole San Fernardo Sonora Williams Commerce Grass Valley Mammoth Lakes Pismo Beach San Francisco South El Monte Willits Concord Greenfield Manteca Pittsburg San Juan Bautista South Gate Woodland COMPETING BY REDUCING THE SIZE OF THE PIE Bidding of kickbacks for points of sale at an all time high 85% To Owens & Minor, 80% to Kohl s, 75% to Home Depot, 70% to Office Depot, 65% to CDW, 55% to Pottery Barn/Williams Sonoma, 50% to CEMEX, etc., etc. 20% to 30% of Bradley-Burns revenue pie rebated back to corporate bottom lines. The smaller the pie, the more desperate the bidding..

6 The World is Changing at Lighting Speed California s Tax Structure Isn t! The Policy Issues. What is taxed.current base has no relevancy to this century s economy. How it is distributed.need for more equability destination, pools or other? Standards for tax rebates Eliminate the if we don t do it, the city next door will problem.

7 Local Sales Taxes in California Demographics, Technology and Giving it Away Michael Coleman Revenue and Taxation Policy Committee January 16, Municipal Revenues in Moderate Recovery Local 1% Sales Tax Revenue as a Percent of Personal Income 2 Source: California State Board of Equalization (Sales Tax), US Dept of Commerce Bureau of Economic Analysis (California Personal Income)

8 Local 1% Sales Tax Revenue as a Percent of Personal Income Consumer spending growth is in: Housing Healthcare Food Entertainment Education 3 Source: California State Board of Equalization (Sales Tax), US Dept of Commerce Bureau of Economic Analysis (California Personal Income) Services Commonly Taxed in Other States But Not California Texas Florida Utah #States* Professional sports (34), amusement parks (34), cultural events (29), circus/fairs (33), X X X bowling alleys (26) Private club memberships, golf X X X 23 Garment, shoe repair or alteration X X X 19 Marina services X X X 15 Laundry / dry cleaning X - X 21 Exterminating X X - 19 Pet grooming X - X 15 Carpet / upholstery cleaning X Remodeling Labor X - X 14 Health clubs X Landscaping / lawncare X Swimming pool cleaning X Digital downloads X - X 23 Source: Mazerov Expanding Sales Taxation of Services: Options and Issues, Center on Budget and Policy Priorities *States plus District of Columbia 4

9 Looking For Solutions Sales Tax: Expanding the Base Estimated Sales and Use Tax Revenues Amusement Parks Sporting Events Appliance/Furniture Repair Golf Vehicle Repair Veterinarians Total State GeneralFund Counties Realignment Local BradleyBurns CoTransp ¼% +Prop172 ½% Local Add-on TrUTax (millions) % % 1.0% 0.75% various Total $56.7 $22.5 $14.4 $10.8 $11.8 $116.2 $47.3 $18.8 $12.0 $9.0 $9.8 $96.8 $49.6 $19.7 $12.6 $9.4 $10.3 $101.6 $64.7 $25.7 $16.4 $12.3 $13.4 $132.6 $641.0 $254.3 $162.8 $122.1 $133.1 $1,313.3 $672.9 $267.0 $170.9 $128.2 $139.7 $1,378.7 $1,532.0 $608.0 $389.1 $291.8 $318.2 $3,139.1 Source: Board of Equalization 5 Defining Situs Where Does the Sale Take Place in Remote Sales? What is the location of the sales transaction (the situs)? Seller s location? Location of product receipt? Product location? California currently uses origin sourcing, the situs is the retailer s place of business where negotiations take place. Origin sourcing often causes the concentration tax revenue in one location far in excess of service costs at the office or warehouse location, and economic activity, service impacts also occur elsewhere (i.e., where product is used) To lure jobs and tax revenues, some cities have entered into rebate agreements with corporations. 6

10 Looking For Solutions Sales Tax 20% to 30% of total local taxes paid statewide are now rebated back to corporations rather than funding public services. 7 Looking For Solutions Sales Tax Local 1% Sales Taxes Nearly $2 Billion 20% to 30% of total local taxes paid statewide are now rebated back to corporations rather than funding public services. 8

11 Modernization Options 1 Modernize (Broaden to Services) Pooling (End Pooling of Online Retail Sales, third party vehicle sales made at DMV, and lower threshold to $100,000 from $500,000 on out of state sales ) Destination Sourcing (Allocate local sales tax to the destination of buyer for all on-line retail sales) Exemptions (Adopt Criteria and Sunset) Lower the Rate & Broaden the Base 2 Broaden Base Lower Rate Rate Annual Sales Tax 7.5% Local Bradley Burns 1% (YE2014Q2) 1.0% $6,013,986,902 Current Statewide 7.5% 45,104,901,765 Expanded Base Statewide 7.5% 86,740,195,700 Lowered Rate Statewide 4.0% 46,261,437,707 Expanded Local Same Ratio (1.0% / 7.5%) $6,168,191,694 4%

12 Taxable Services in Other States 3 Repairs and Installations Personal Services Business Services Admissions & Amusements Computer Services Professional Services Other Services Agricultural Services Lease and Rentals A Tale of Two Cities (services taxed in Texas) Q4 as % of 2007Q4 # of Quarters to Recover to 2007Q4 Level Houston 129% Only below 2007Q4 five times; the first time was 2010Q2 Los Angeles 108% 23

13 A Tale of Two Capital Cities 5 Quarterly Sales Tax 50,000,000 Austin Sacramento 25,000,000 40,000,000 20,000,000 30,000,000 15,000,000 20,000,000 10,000,000 10,000,000 5,000, Q4 as % of 2007Q4 # of Quarters to Recover to 2007Q4 Level Austin 129% 16 (excluding 2008Q1) Sacramento 108% 24 (Excluding 2008Q3) Brick and Mortar v. Online Sales Tax Growth 6 Statewide Average % Change of 2 Years (2012Q2 2014Q2) Business Storefront Dot.com Amazon n/a (yet) 26.5% Macy s 0.7% 23.9% Nordstrom -2.9% 64.6% Wal-Mart 1.6% 10.4% Target 1.6% 23.4% J.C. Penney -9.7% 4.0% Sears 1.7% 12.3%

14 Structural Frailties 7 *Types of Sales/Use Tax Exemptions Exemptions Local Cost >$3.2B Revenue lost are SBE estimates using data from outside sources. Data is not available for the majority of exemptions, and remain unknown. SBE Publication Policies Challenges Conditions Alternatives Examples