Taxable Talk

If you’re a business in California that doesn’t maintain inventory or sell products—that is, you’re a service business—you haven’t had to register with the Board of Equalization. The Board of Equalization administers California’s sales tax laws. That may change, though. As part of the most recent budget deal California service businesses that have gross receipts over $100,000 will soon get a “Dear Valued Soon To Register with the BOE” letter. That’s right, if your gross receipts are over $100,000 you will have to register with the BOE and file an annual Use Tax Return.

The Use Tax is the equivalent of the sales tax for items purchased where no sales tax is charged. You are supposed to remit to the state Use Tax when you buy that book from Amazon.com or any other out of state retailer that doesn’t charge sales tax.

Of course, most individuals don’t comply with the Use Tax. The hope of the state legislature is that by forcing firms to register with the BOE and file a Use Tax Return that $26 million would be found in additional revenue. Consider, though, the cost to businesses in the state. More paperwork and a higher regulatory burden for California. It certainly doesn’t make this state seem golden for businesses.

What happens when tax rates increase? Tax Collections decrease. That’s been shown time after time.

So what has happened when California raised sales tax rates statewide on April 1st? Bill Leonard is reporting that collections fell 12% in April. Of course, this being California expect the Democrats in the legislature to ask for another sales tax increase when Proposition 1A falls next week.

One of my favorite weekly reads is the Leonard Letter. Bill Leonard is one of the elected members of the Board of Equalization. Mr. Leonard notes,

“Late last year an article entitled “Why Is Buying Hot Chocolate So Confusing?”appeared in a tax journal. It was bandied about as an example of how difficult it is for California retailers to comply with the state’s sales tax law. I asked the Board of Equalization staff to respond to the article and have now reviewed a 3 ½ page letter attempting to explain when hot chocolate is taxable. That it takes 3 ½ pages to answer what should be a simple yes-or-no question gives you a window into the absurdity that is state tax law.”

The letter that Mr. Leonard references is here. The question arises as sales tax was collected on hot chocolate sold at a Starbucks inside a Target store but not inside a Safeway (grocery) store nor in the lobby of the Bank of America building in downtown San Francisco. From the letter:

“Sales and Use Tax Regulation 1602, Food Products, (copy enclosed), provides that generally tax does not apply to sales of food products for human consumption except as provided in Regulation 1503, 1574 and 1603. “Food products” include among other items, coffee, tea, noncarbonated and nonalcoholic beverages, breads, bakery products, pizzas, candy, confectionery, chewing gum and cookies. Generally, tax does not apply to sales of the above items except when they are sold under circumstances as provided in Regulations 1503, 1574 and 1603.”

After nearly three pages of legalese the author of the letter notes, “Based on the information presented in the article, it is not clear why sales tax was collected by Starbucks on the sale of the hot chocolate.”

And some legislators want to extend sales tax to services. Oh, joy….

Pity the smokers in California, home of one of the US’s top cigaratte tax rates. Why not buy the cigarettes over the Internet and save on the tax?

That’s not a bad idea, except that the Board of Equalization, California’s watchdog agency for cigarette taxes, is auditing out-of-state companies shipping cigarettes into California. (The Federal Jenkins Act allows California review online vendors’ invoices.) And they’re sending bills to Californians. The BOE estimates that it will collect $52 million from California smokers.

Hat Tip: Kerry Kerstetter (The Tax Guru)

News Story: Sacramento Bee

California’s sales tax rules, enforced by the Board of Equalization are far too complicated. Then throw in political shenanigans and you get…a lawsuit.

San Francisco International Airport is located just south of the City by the Bay in San Mateo County. United Airlines has a major hub at SFO. This sounds like a sales tax boon for San Mateo County.

Except for a law that relocates the sale from the airport to an office building in Oakland, in Alameda County. The Governator signed a bill that will eliminate this “quirk” in 2008. San Mateo County decided they couldn’t wait that long.

Did I mention that Oakland gives a kickback of $0.65 to United for every dollar of sales tax collected? But as Aero-News notes, the Legislature believes the deal is currently legal.

Given the backlog in California’s courts, the case will likely not be decided for a couple of years.

News Stories: Aero-News Net, San Francisco Business Journal