This article is reproduced with permission from Spidell Publishing, Inc.
Even with the extension of the income tax rate increases via 2016’s Proposition 55, the Legislature is looking for more money. Sales tax on services and a tax on candy and snack food could become a reality – if not this year, by 2019.
Sales Tax on Services
SB 640 (Hertzberg) seeks to realign California’s tax system to rely more on sales tax revenue than income tax revenue, which the bill states will produce more stable revenue. In its current form, the bill does not impose a sales tax but makes legislative findings
in response to pending proposals for federal tax reform and California’s tax climate. The bill would direct the Legislature to consider:
- imposing a modest state, but not local, sales tax on services. Health care services, education services, child care, rent, interest, and services represented by “very small businesses” would be exempt;
- whether there would be “offsetting tax relief” for middle- and low-income California families;
- lowering the minimum franchise tax; and
- reducing the corporate rate on small businesses.
California already taxes a limited number of services: printing, fabrication, and some repair services. This is similar to about 13 other states that tax only these types of services, although some of these states tax one or two other services as well. Four states tax all services, unless otherwise exempted: Hawaii, New Mexico, South Dakota, and West Virginia. Hawaii is the only state that taxes all professional services. To date, Hawaii, New Mexico, and South Dakota are the only states that tax legal and accounting services.
The possibilities are endless when you consider how many types of services are out there. The District of Columbia taxes yoga and other gym/health club activities, while Washington only taxes yoga/Pilates if the class is offered in a gym. Ohio imposes a sales tax on hair removal but not on hair cutting, styling, or coloring.
In terms of the most interesting services that are specially taxed, Iowa is the winner. Iowa taxes dating services, Turkish baths, weight loss salons, and taxidermy services.
In essence, enacting this bill would be the first step toward implementing a sales tax on services. Last year’s SB 1445 (Hertzberg), which did not pass the Legislature, was similar to SB 640.
Like a phoenix rising from the ashes, AB 274 (Garcia) would, if enacted, put a proposition on the ballot to overturn Proposition 163. If the proposition were to pass, beginning in 2019, sales and use tax would apply to the sale, or the storage, use, or other consumption in this state, of certain food products for human consumption, which include candy, confectionery, and snack foods.
The definition of a “snack” will be a nightmare. In 1991, the Board of Equalization was tasked with defining a “snack” when the State enacted the Snack Tax Fiasco of 1991, which was killed by the voters in 1992 via the passage of Proposition 163. The result of the 1991 Act was an 87-page report identifying certain snack foods as taxable (84 pages) and nontaxable (3 pages). The following is what Bob Spidell wrote in Spidell’s California Taxletter®, August 1991 issue:
“Here are some examples that seem to have no discernable relationship to logic, common sense, or any nutritional standard known to man.
- Granola bars are taxable but granola breakfast cereal is not taxable.
- Breakfast cereals generally are nontaxable no matter how high the fat or sugar content, but breakfast bars and breakfast drinks are taxable, no matter how healthy the contents.
- Seeds, nuts, raisin, and granola are not taxable by themselves, but they become taxable when combined into a trail mix.
- Candy and candy bars are taxable, but ice cream and ice cream bars are not taxable.
- Neither cheese nor soda crackers are snack foods, but put them into one package and they magically become a taxable snack food.
- Size also has some mysterious effect. Soda crackers are not taxable, but soup and oyster crackers are taxable even if you plan to drown them in nontaxable soup.
- Candy sold through vending machines is taxable at the full selling price. However, cold food products (e.g., cold sandwiches, milk, or apples) are still partially exempt under the prior low, which did not change.
- Candy and glazed fruit that are used in cooking and baking are not subject to sales tax. Apparently, buyers are on the honor system not to cheat…”
For more information about this article, please contact our tax professionals at firstname.lastname@example.org or toll free at 844.4WINDES (844.494.6337).