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California Tax News

(posted: April 28th, 2017)


Is a tax on snacks and your legal and accounting fees in our future?

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;
  • 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.

Comment

	
There are no definitions in the bill of a "small business" or a "very small business," "offsetting tax relief," or "modest."

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. 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 fees.

The possibilities are endless when you consider how many types of services there are out there. In essence, enacting this bill would be the first step towards implementing a sales tax on services. Last year's SB 1445 (Hertzberg), which did not pass the Legislature, was similar to SB 640.

Snack Tax

For those of us "seasoned" (aka been around for a while) tax professionals, you may recall the enactment of the Snack Tax Fiasco of 1991, which was killed by the voters in 1992 via the passage of Proposition 163.

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.

Again, like in the early 1990s, the definition of a "snack" will be a nightmare. In 1991, the Board of Equalization was tasked with defining a "snack." The result was an 87-page report identifying certain snack foods as taxable (84 pages) and nontaxable (3 pages).

Here are some examples from 1991 that seem to have no discernible 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, raisins, 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.

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