Sales and use taxes in California are among the highest in the United States and are imposed by the state and by local governments. Sales taxes are regressive. Local sales tax increases also create geographical variations in sales tax rates which can place local businesses at a competitive disadvantage. Poor families pay almost eight times more of their incomes in sales taxes than the best-off families. Local sales tax rate increases also create geographical variations in sales tax rates which can place local businesses at a competitive disadvantage.
Sales tax rates
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At 7.25%, California has the highest minimum statewide sales tax rate in the United States, which can total up to 10.25% with local sales taxes included. As of January 1, 2017, the statewide sales tax rate decreased from 7.50% to 7.25% as a result of the expiration of the temporary statewide sales tax increase under Proposition 30 that California voters approved in November 2012.
Some claim the high sales tax rates partially compensate for the reduced property tax revenue resulting from Proposition 13 which California voters approved in June 1978. However, others point out that, in most counties (all but the rural counties), property tax revenues today are higher than the year before Proposition 13 passed, even after adjusting for inflation and population growth.
Sales and use taxes in California (state and local) are collected by the California Department of Tax and Fee Administration, whereas income and franchise taxes are collected by the Franchise Tax Board.
The statewide base sales tax rate of 7.25% is allocated as follows:
- 7.25% â€" State + Local
- 6.00% â€" State
- 3.9375% â€" State â€" General Fund
- 0.50% â€" State â€" Local Public Safety Fund
- 0.50% â€" State â€" Local Revenue Fund for local health and social services
- 1.0625% â€" State â€" Local Revenue Fund (2011)
- 1.25% â€" Uniform Local Tax
- 0.25% â€" Local County â€" Transportation funds
- 1.00% â€" Local City/County â€" Operational funds
- 6.00% â€" State
The statewide sales tax in California was first imposed on August 1, 1933, at the rate of 2.50% under the "Retail Sales Act of 1933." No local sales taxes were levied at that time. In an editorial dated September 5, 1933, the Los Angeles Times criticized the 2.50% sales tax rate in stating that the "sales-tax rate should not have exceeded 1 per cent" and that the tax rate was "so high as to discourage business, which will make the tax less productive."
Supplementary local sales taxes
Supplementary local sales taxes may be added by cities, counties, service authorities, and various special districts (such as the Bay Area Rapid Transit district). Local county sales taxes for transportation purposes are especially popular in California. Additional local sales taxes levied by counties and municipalities are formally called "District Taxes." The effect from local sales taxes is that sales tax rates vary in California from 7.25% (in areas where no additional local sales taxes are levied) to 10.25%. For example, the city of Sacramento, the state capital, has a combined 8.25% sales tax rate, and Los Angeles, the largest city in California, has a combined 9.50% sales tax rate.
Local sales tax rate cap
The combined tax rate of all local sales taxes in any county is generally not allowed to exceed 2.00 percent. However, this is a statutory restriction and the California Legislature routinely allows local governments, through the adoption of separate legislation, to exceed the 2.00 percent local tax rate cap. The 2.00 percent local tax rate cap is exceeded in any city with a combined sales tax rate in excess of 9.25% (7.25% statewide tax rate plus the 2.00% tax rate cap). As of January 1, 2018, all of Los Angeles County and 7 other California cities (Albany (Alameda County), El Cerrito (Contra Costa County), Greenfield (Monterey County), Hayward (Alameda County), Newark (Alameda County), San Leandro (Alameda County), and Union City (Alameda County)) have a combined sales tax rate in excess of the 2.00 percent local tax rate cap.
SB 566 (2003) and the rise in local sales tax increases
The number of local sales taxes greatly increased following the passage of SB 566 in 2003. SB 566 legally authorized all California cities to levy additional local sales taxes. SB 566 also increased the maximum combined local sales tax rate (local sales tax rate cap) that can be levied by local governments from 1.50% to the current 2.00%. As of April 1, 2017, 176 cities and 32 counties have approved local sales tax increases. Not only has the number of local city sales tax increases exploded since the passage of SB 566, but the magnitude of the sales tax increases (as measured by the sales tax rate increase) has also significantly increased as more cities are seeking larger sales tax rate increases. During the November 2016 election, approximately 65 additional local sales tax measures were approved by voters in California. These local sales tax measures generally became operative on April 1, 2017.
The SB 566 language authorizing cities to levy local sales taxes was inserted near the end of the legislative session without the usual public scrutiny, was approved by a politically partisan vote, and was signed into law by former California Governor Gray Davis after the election in which he was recalled from office.
Cities with at least 10.00% combined sales tax rates
As of January 1, 2018, 15 California cities (all in Los Angeles County) have a combined sales tax rate of at least 10.00%:
Effective January 1, 2017, the California statewide sales tax rate decreased by 0.25% as a result of the expiration of the temporary sales tax increase under Proposition 30 approved by California voters during the November 2012 election. However, many local sales tax measures were approved by voters during the November 2016 election, and those sales tax increases generally became operative on April 1, 2017.
Los Angeles County sales tax rate increases July 1, 2017
On July 1, 2017, the Los Angeles County transportation sales tax increase of 0.50% approved by local voters during the November 2016 election went into effect. The combined sales tax rate in Los Angeles County increased from 8.75% to 9.25% in all unincorporated areas of the county and all cities within the county except for 15 cities where voters previously approved local city sales tax increases. In those 15 cities, the new combined sales tax rates increased to either 9.75% (Avalon, Commerce, Culver City, Downey, El Monte, Inglewood, San Fernando, and South El Monte) or 10.25% (Compton, La Mirada, Long Beach, Lynwood, Pico Rivera, Santa Monica, and South Gate).
Los Angeles County sales tax rate increases October 1, 2017
On October 1, 2017, the Los Angeles County homeless programs/services sales tax increase of 0.25% approved by voters during the March 7, 2017 election became operative. The combined sales tax rate in Los Angeles County increased from 9.25% to 9.50% in all unincorporated areas of the county and all cities within the county except for 15 cities where voters previously approved local city sales tax increases. In those 15 cities, the combined sales tax rate increased to 10.00% (Avalon, Commerce, Culver City, Downey, El Monte, Inglewood, San Fernando, and South El Monte) or remained the same at 10.25% (Compton, La Mirada, Long Beach, Lynwood, Pico Rivera, Santa Monica, and South Gate).
The 0.25% sales tax increase is not collected in seven cities within Los Angeles County where the aggregate sales tax rate is not 0.25 percent or more below the legal local tax rate cap. Those seven cities, which have a combined sales tax rate of 10.25%, are Compton, La Mirada, Long Beach, Lynwood, Pico Rivera, Santa Monica, and South Gate. However, if a sales tax rate for any of the seven cities expires or is reduced while the homeless programs/services sales tax increase is in effect, the homeless programs/services sales tax will immediately become operative in that city.
Cities with highest combined sales tax rates by county
As of January 1, 2018, the following California cities have the highest combined sales tax rate within each of the 58 counties in California:
Local sales taxes subject to voter approval under Proposition 218
All local sales taxes are subject to voter approval under Proposition 218 ("Right to Vote on Taxes Act") which California voters approved in November 1996. Whether simple majority voter approval or two-thirds voter approval is required depends upon the type of sales tax levied and the type of local government imposing the sales tax.
Unrestricted general sales taxes are subject to majority vote approval by local voters. General sales taxes can be spent by local politicians for any general governmental purpose, including public employee salaries and benefits. General sales tax spending decisions are made after the tax election by local politicians as part of the regular annual local government budget process. Some local governments may engage in general sales tax abuses in an effort to evade the two-thirds vote requirement applicable to special sales taxes.
Special sales taxes dedicated for one or more specific purposes are subject to two-thirds vote approval by local voters. Any sales tax imposed by a local government other than a city or a county (e.g., a special district such as a local transportation agency) must be a special tax subject to two-thirds vote approval by local voters.
Proposition 218 does not legally authorize any local government to levy a sales tax. The legal authority to levy a local sales tax must come from a state statute. A two-thirds vote of all members of the legislative body of the local government is usually required before a local sales tax measure may be presented to voters at an election.
Relationship between sales tax increases and public employee costs
The driving force behind many local sales tax increases is skyrocketing public pension costs and public employee retiree healthcare. Research has shown that local sales tax increases are concentrated in California localities that have the largest pension problems.
In an effort to increase the chances of passing a local sales tax, some local governments engage in budgetary games in which they place a sales tax measure on the ballot to help fund a politically popular service (e.g., public safety), and if the sales tax passes, it enables the local government to free up other existing taxpayer funds that can then be spent on less politically popular items such as high public employee salaries and benefits.
County transportation sales taxes
Countywide sales taxes for transportation purposes are very popular in California. However, transportation sales taxes are regressive and also shift the financial base of transportation systems from user fees to taxes paid by all taxpayers without regard to direct reliance on those transportation systems. County transportation sales taxes are typically supported (including with significant campaign contributions) by interest groups that disproportionately benefit from the tax, including the local business community, the construction industry, real estate developers, and public employee unions. Some counties have passed multiple transportation sales taxes increases such as Los Angeles County that has passed four transportation sales tax increases for a combined rate of 2.0%. County transportation sales taxes generally do not include traffic performance standards that actually require improved traffic conditions.
Sales tax taxpayer tool
As part of its Taxpayer Tools publication series, the Howard Jarvis Taxpayers Association has released a publication to assist voters and taxpayers regarding local sales tax measures placed on the ballot by a local government in California.
Local government data in sales tax elections
It is often helpful for voters to have financial data about a local government proposing a sales tax so that voters can make more informed voting decisions regarding the merits and need for the sales tax. Much of the financial data about a local government can be obtained directly from the local government itself. Additional information that can be of value to voters includes public employee salary and benefits data (especially pension data), and annual budgetary and financial reports. Local government budgetary spending priorities, as reflected by recent budgetary data, can be especially helpful in general sales tax elections where local politicians decide how to spend the sales tax proceeds.
Extensive public data sources outside of a local government are also available to voters in connection with local sales tax elections.
Local government issues related to sales tax elections (e.g., local government “informational†campaigns and impartial ballot questions) can impact the integrity and fairness of the election process. Voter/taxpayer issues related to local sales tax elections (e.g., cumulative tax burden and precedent) can impact the individual voter decision-making process as well as election outcomes. Support and opposition campaigns in local sales tax elections can also impact election outcomes.
Local sales tax reduction or repeal using Proposition 218
Proposition 218 (“Right to Vote on Taxes Actâ€) was a 1996 initiative constitutional amendment approved by California voters. Proposition 218 includes a provision constitutionally reserving to local voters the right to use the initiative power to reduce or repeal any local tax, assessment, fee or charge, including provision for a significantly reduced petition signature requirement to qualify a measure on the ballot. A local sales tax, including a sales tax previously approved by local voters, is generally subject to reduction or repeal using the local initiative power under Proposition 218.
Examples where the reduction or repeal of a local sales tax may be appropriate include where there has been significant waste or mismanagement of sales tax proceeds by a local government, when there has been controversial or questionable spending of sales tax proceeds by a local government (particularly where sales tax proceeds are used to pay for excessive public employee salaries and/or benefits such as pensions), when the quality of the programs and services being financed from sales tax proceeds is not at a high level expected by voters, when the local sales tax rate is excessive or unreasonably high (particularly in situations where a significant local sales tax increase was narrowly approved by the voters), or when promises previously made by local politicians about the spending of local sales tax proceeds are broken after voter approval of the sales tax (particularly in situations where local politicians made legally nonbinding promises concerning the spending of general sales tax proceeds that are not legally restricted for specific purposes).
A local sales tax used to repay bonds is a legally more complex situation because federal contract impairment issues may preclude the exercise of the local initiative power under Proposition 218. Local voter-approved transportation sales taxes often include at least a portion of the tax proceeds to repay bonds. Advice from legal counsel is generally needed in situations where bonds have been issued and sales tax revenues have been pledged to repay the bonds. A local compensatory initiative under Proposition 218 is an alternative option when contract impairment problems are present.
Recent statewide sales tax increases
Recent temporary statewide sales tax increases include:
- From April 1, 2009 until June 30, 2011, the state sales and use tax increased by 1% from 7.25% to 8.25% as a result of the 2008-2009 California budget crisis.
- Effective January 1, 2013, the state sales and use tax increased by 0.25% from 7.25% to 7.50% as a result of Proposition 30 passed by California voters in the November 6, 2012 election. The change was a four-year temporary tax increase that expired on December 31, 2016.
Taxation of online sales
As of July 1, 2011, California applies sales tax to online retailer purchases. It is the retailer's responsibility to collect the state sales tax on all purchases made within (or shipped to) California regardless where the retailer/supplier is located. This sales tax levy was arranged through a negotiation between the governor, Jerry Brown, and the large online retailers such as Amazon. It is commonly referred to as "the Amazon deal." Before this deal Amazon, and others, remained physically outside of the state (nexus law) to get around the sales tax laws as they were written and interpreted before the deal was brokered, whereas now Amazon and others have many warehouse, office, and research locations within the state of California, thus contributing to the California economy as a whole.
Previously Assemblywoman Nancy Skinner of Berkeley twice introduced legislation to apply sales tax to online retailers such as Amazon.com only to have the bills be vetoed by the governor. On 19 January 2011 Skinner introduced similar legislation in the form of AB153. Because of political wrangling this bill never made it to law but the above "deal" was brokered by the governor. This bill would have required out-of-state online sellers with affiliates in California to collect sales tax on purchases made by state residents. The affiliate provision was included to ensure that only sellers with a California nexus are taxed, as required by federal law and the U.S. Supreme Court's ruling in Quill Corp. v. North Dakota.
Exemptions
In general, sales tax is required on all purchases of tangible personal property to its ultimate consumer. Services are not subject to sales tax (but may be subject to other taxes), although some politicians want to extend the sales tax to services. Liability for sales tax attaches to the seller, not the buyer; but the seller is allowed by law to collect the tax from the buyer (and if the seller does so, the buyer is obligated to pay it).
Vehicle purchases are taxed based on the city and county in which the purchaser registers the vehicle, and not on the county in which the vehicle is purchased. There is therefore no advantage in purchasing a car in a cheaper county to save on sales tax (a one-percent difference in sales tax rate would otherwise result in an additional $300 loss on a $30,000 car).
In grocery stores, unprepared food items are not taxed but vitamins and all other items are. Ready-to-eat hot foods, whether sold by supermarkets or other vendors, are taxed. Restaurant bills are taxed. As an exception, hot beverages and bakery items are tax-exempt if and only if they are for take-out and are not sold with any other hot food. If consumed on the seller's premises, such items are taxed like restaurant meals. All other food is exempt from sales tax.
Also excluded are food animals (livestock), food plants and seeds, fertilizer used to grow food, prescription drugs and certain medical supplies, energy utilities, certain alternative energy devices and supplies, art for display by public agencies, and veterans' pins. There are many specific exemptions for various veterans', non-profit, educational, religious, and youth organizations. Sale of items to certain out-of-state or national entities (mostly transportation companies) is exempt, as are some goods sold while in transit through California to a foreign destination.
Occasional or one-time sales not part of a regular business are exempt, except that sales of three or more non-food animals (puppies, kittens, etc.) per year are taxed.
There are also exemptions for numerous specific products, from telephone lines and poles, to liquid petroleum gas for farm machinery, to coins, to public transit vehicles. There are partial exemptions for such varied items as racehorse breeding stock, teleproduction service equipment, farm machinery, and timber-harvesting equipment. For an organized list of exemptions, with estimates for how much revenue the state loses and the people saves for each, see Publication 61 of the Board of Equalization.
Sales tax is charged on gasoline. The tax is levied on both the gasoline and on the federal and state excise taxes, resulting in a form of "double taxation". The sales tax is included in the metered price at the pump. The California excise tax on gasoline as of mid-2011 is 35.7 cents per gallon for motor fuel plus a 2.25% sales and use tax, 13 cents per gallon for diesel plus a 9.12% sales and use tax.
Motor vehicle gasoline and jet fuel are subject to special taxation regimes. In 2005, there was a political dispute in the San Francisco Bay Area about whether revenues for jet fuel should be credited to San Mateo County (where San Francisco International Airport appears to be physically located), the City and County of San Francisco (where the airport is legally located, because it is owned by the City-County), or Alameda County, where Oakland International Airport is located. (The distinction is largely point of sale delivery vs. point of negotiation for the sale.) This is controlled by Regulation 1802, which has other provisions about businesses which have multiple locations.
The California Department of Tax and Fee Administration provides an online list of sales taxes in the local communities of the state.
Software electronically transmitted to customers
According to Regulation 1502, the sale of noncustom (canned) software to customers who download the software from a server is generally not subject to sales tax. However, if the customer is provided a copy of the software on a physical storage medium such as a CD-ROM or a DVD, the entire transaction is generally taxable. Thus, a customer can generally avoid sales tax liability by purchasing a downloadable version of software instead of a physical version.
Debate
Critics of the current California sales tax regime charge that it gives local governments an incentive to promote commercial development (through zoning and other regulations â€" otherwise known as fiscalization of land use) over residential development, including the use of eminent domain condemnation proceedings to transfer real estate to higher sales tax generating businesses. Some claim that poor families pay almost eight times more of their incomes in sales taxes than the very best-off families, making sales tax an extremely regressive tax. This is partly due to the fact that poor families pay relatively little in income tax, leaving most of their income available to spend and therefore be subject to sales taxes. It is also due to the fact that people with higher incomes are able to save a larger portion of their income. However, that statistic did not take into account the fact that all saved money will eventually be subject to sales taxes and much of it will also be lost to inheritance taxes. Further, since lower income families spend a higher portion of their income on groceries, states like California that exempt groceries from sales tax are not as regressive in the implementation of sales taxes.
See also
- California Proposition 218
- California Proposition 218 Local Initiative Power
- California Proposition 13
References
