You’re a business owner, and you’ve just won a nice contract with the State of California. Don’t forget to add sales tax.
Yes, if you’re selling to the State of California, you must charge California sales tax. Let’s look at this logically, based on a $10,000 sale to a state agency.
We’ll assume that the sale is made in Orange County (sales tax rate of 7.75%), resulting in sales tax of $775.00. You collect $10,775, keep $10,000, and then remit $775 back to California. The Board of Equalization collects the money, and then turns it over to the General Fund. The General Fund allocates the money to the appropriate state and local agencies, including the agency that you sold to.
Wouldn’t life be simpler if the state were exempt from state sales tax? You could argue that local and state agencies wouldn’t benefit from the sale. However, the real beneficiaries of California’s policy are the bureaucrats administering sales tax. California’s rules increase their workload and lead to more employees. If California were to exclude government sales from sales taxes, sales tax revenues would go down, of course. But so would expenses.
In the end it would be a wash (as far as direct revenues and expenses). However, because you would need fewer employees to administer the Board of Equalization, and a bit less time for companies to prepare their quarterly reports to the BOE, costs would decrease and productivity would increase.
What are the chance of this happening? Just about zero.