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What Economic Activities are Missed by Taxable Sales?

Note: this page contains historical information from statewide goal measurement prior to 2007 that estimated a diversion percentage. For 2007 and subsequent years, per capita disposal (expressed in pounds/person/day) is calculated by comparing reported disposal tons to population. This new goal measurement system is described on the Goal Measurement: 2007 and Later web page.

What Are Taxable Sales?

Taxable sales, also known as taxable transactions, are a tabulation by the State Board of Equalization (BOE) of the dollar amount of California retail transactions (not the tax revenue amount), excluding those transactions specifically exempt from the California Sales and Use tax. The use tax generally applies to the storage, use, or other consumption in this state of tangible personal property purchased from retailers in transactions not subject to the sales tax. Use tax may also apply to purchases shipped to a California consumer from another state.

BOE publishes quarterly and annual taxable sales reports that include taxable transactions data by city [1], unincorporated county area [2], countywide [3], and statewide [3],[4]. Hardcopy reports are available from BOE’s Research and Statistics Division at (916) 445-0840.

Total taxable transactions do not necessarily indicate the gross sales of retailers dealing in taxable items. Only sales subject to sales or use tax are tabulated; excluded are sales for resale, sales of nontaxable items such as some food products and prescription medicines, and taxable transactions disclosed by BOE audits.

Some businesses dealing primarily in nontaxable activities, such as services, manufacturing, contracting, or wholesaling, either sell some merchandise that is subject to sales tax or use some items that were purchased ex-tax (without tax) and on which use tax must be paid. These transactions subject to sales or use tax are included in the tabulations.

Exemptions and Exclusions from the Sales and Use Tax

Since 1933, many exemptions and exclusions have been granted that remove sales and use tax liability for various types of property and certain individuals or organizations. For example, BOE’s May 2003 Publication Number 61, Sales and Use Taxes: Exemptions and Exclusions (excerpted in the table below), includes two comprehensive listings that identify and describe these exemptions and exclusions by category and by alphabetical reference. The category listing is organized by major category, category, and subcategory within five tiers. For each subcategory, there is an estimate of sales and use tax revenue lost due to the exemption/exclusion as summarized in the following table. However, for many subcategories the revenue lost is listed as "N/A" (not available) because the information is not known.

Major Categories Number of Subcategories Annual Revenue Lost (in millions)
Necessities of Life
Food 6 $3,613.7
Health Related 10 717.9
Housing 3 3,264.0
General Public Benefit
Alternative Energy 3 N/A
Museums and Public Art Exhibits 4 N/A
Nonprofit, Religious, and Educational Organizations 20 13.3
Other 4 N/A
Industry Benefit
Transportation Related Industry 17 289.7
Entertainment Industry 5 40.0
Petroleum Industry 1 N/A
Manufactured Housing and Buildings 7 78.3
Leasing Industry 10 44.0
Other Industry or General Business Exemptions and Exclusions 36 562.5
Exclusions by Definition
"Sales Price" and "Gross Receipts" 11 N/A
Transactions Not Considered Sales or Purchases of Tangible Personal Property 7 N/A
Exclusion from the Term "Person" 2 N/A
Other
Other Exemptions, Exclusions, and Credits 10 2.0
Total 156 $8,625.4

Annexations and Changes in Local Government Boundaries

Useful, comprehensive data on annexations to cities and changes in city boundaries are not readily available from BOE. They may be available, county-by-county, from local agency formation commissions (LAFCO). BOE receives requests from county LAFCOs and other entities for estimates of local sales and use tax revenues given specified proposed annexation boundary lines. When this occurs, a simple reply letter from BOE is prepared providing a rough estimate. However, the proposed annexation upon which the BOE estimate is based may never be implemented, and the final boundaries are likely to be different from the original proposal.

The impact of actual local government annexations on BOE data is complicated. Each month BOE receives 30 to 50 Statement of Boundary Changes from county LAFCOs. Included with the Statement of Boundary Changes are a map, a legal description of the new boundaries, and a statement regarding whether or not the annexed area is developed and/or inhabited. If the area is developed, the filing must also include an alphabetical listing of all streets and addresses within the annexed area.

The Statement of Boundary Changes statement regarding whether or not the annexed area has been developed is not always accurate and the filing does not include any information regarding land use (for example, residential, commercial, or industrial). BOE relies on the documentation supplied with the Statement of Boundary Changes to determine whether or not the area is developed and to identify those taxpayer's accounts with locations in the annexed area. This information is then used to initiate seller’s permit registration changes to ensure proper coding of accounts and to compile data from previous allocations by these locations. These registration changes cause modified local sales and use tax revenue advances to the local jurisdictions impacted by the annexation. For example, January estimated sales and use tax payments by taxpayers are due February 4, and using a combination of actual and historical data, about 90 percent of the local government portion is sent by BOE to local governments in March. This process is repeated each month.

BOE relies on taxpayers to provide complete and correct allocation information. However, the taxpayers have some latitude in the level of detail reported on their allocation schedules. For example, a national restaurant chain may submit a single tax return covering seven different restaurant locations, one in one jurisdiction and six in another. While the taxpayer must segregate the allocations for the two jurisdictions, they are not required to segregate the allocations for the six locations that are in the same jurisdiction. If only one of the six locations is included within the annexed area, it is impossible to determine the amount of local tax that will shift as a result of the annexation.

Because the taxpayer is not required to provide allocations broken down by specific locations, it is not possible to accurately determine the shift in revenues prior to the actual implementation of the annexation. After the annexation has been implemented and the allocation schedules have been modified to provide for the segregation of taxes based on the separate jurisdictions, it is possible to determine what funds should be provided to the city based on the annexation.

BOE’s published values for taxable transactions (both Taxable Sales in California, and BOE’s Annual Report) are based on taxpayer reported amounts, including annexed areas, since registration changes are made to coincide with the effective date for the annexed area. Accordingly, the published values should reflect annexation changes. Taxpayers are required to notify BOE if there is a change in business or mailing address. BOE’s Publication 73, Your California Seller’s Permit, explains what taxpayers are required to do.

Remote Sales

Surveys by the U.S. Census Bureau now measure business-to-consumer e-commerce or “e-retailing” and have begun to measure business-to-business e-commerce. According to the U.S. Department of Commerce, “hard questions of definition and measurement will still have to be resolved before we can understand the full impact of these changes on our economy.” [5]

Some jurisdictions have expressed concern about the impact of out-of-jurisdiction e-commerce on base-year to report-year taxable sales percentage change values, particularly if a jurisdiction has a base-year prior to 1996. Productivity growth, one of the most important indicators of economic growth, doubled its pace from a 1.4 percent average rate between 1973 and 1995, to a 2.8 percent average rate from 1995 to 1999.

To date, jurisdictions' concerns over the loss of sales and use tax revenue due to e-commerce has been outweighed by national political forces that do not want to burden the “new economy” with a national sales tax, or require e-retailers to collect a myriad of local government sales taxes for every sales tax district in the nation. This may reflect the fact that the evolution of digital business is still in an early stage. A recent survey by the National Association of Manufacturers, for example, found that more than two-thirds of American manufacturers still do not conduct business electronically.

In March 2000, the Census Bureau released the first official measure of an important subset of business-to-consumer e-commerce, “e-retail.” In the fourth quarter of 1999, online sales by retail establishments totaled $5.3 billion, or 0.64 percent of all retail sales. Clearly, the impact of e-commerce on taxable sales, and potential deterioration of the correlation between taxable sales and waste generation, should be carefully monitored.

Taxable Transactions Margin of Error

Technically, there is no such value because the reported taxable transaction amounts are not estimates. The amounts reported are complete counts of reported taxable transactions. There are no sampling errors since there are no samples. There are other types of error such as taxpayers reporting an incorrect amount.

BOE audits approximately three percent of active accounts each year, concentrating on those considered most likely to be inaccurate in their tax reporting. In fiscal year 1998–99, the sales and use tax audit program disclosed net deficiencies of more than $357 million, or 1.19 percent of a total $30 billion in California Sales and Use tax revenue. The most common taxpayer noncompliance categories were:

  • Sales for resale without supporting documentation.
  • Purchases made from out-of-state vendors without payment of use tax.
  • Withdrawal from resale inventory for own use.

The top four types of businesses making errors were:

  • Publishers.
  • Distributors of light industrial equipment.
  • Manufacturers and wholesalers of electronics equipment.
  • Construction contractors and sellers of building materials.

The number of sales and use taxpayers registered to do business in California was 976,502 as of June 30, 1999. [6]

Are There Alternatives?

The fact that there are many economic transactions not subject to the California Sales and Use tax does not invalidate it as an indicator or correlate of waste generation. The challenge is to find a better indicator—one that by itself, or when combined with employment change or some other economic measure, is more strongly correlated with waste generation. According to David Hayes, of BOE's Statistics Section:

“There is no other source for taxable transactions amounts because BOE is the only entity that collects the transaction data and the tax revenue. Caution should be used if a city proposes the use of ‘city’ taxable sales data. This amount is highly likely to be taxable sales revenue received from BOE during a specific year [7]. This (revenue) amount may be affected by several factors, including audit revenue for taxable transactions that may have occurred years prior to the year in which the revenue is received by the jurisdiction. Another factor affecting jurisdiction taxable sales revenue is jurisdiction–to-jurisdiction fund transfers.” [8]

As data is received via taxpayer payments, desk audits, and field audits, BOE makes about 2,000 jurisdiction-to-jurisdiction fund transfers per month.

Some measures of economic activity not subject to the California Sales and Use tax were considered, but rejected, by the original Assembly Bill 2494 Adjustment Method Working Group. They included:

  • Number of business permits
  • Size of business
  • Type of business
  • Wages/salaries
  • Real property tax base
  • Construction (housing starts, permits)
  • Built space (gross square footage)
  • Built space capacity utilization
  • Gross national product
  • Climate and weather history
  • Land use/land type

These measures were not pursued due to problems with quantification, lack of a direct link to waste generation, lack of standardized statewide data, ease-of-use, accuracy, and other practical criteria.

If a jurisdiction finds neither the countywide nor the jurisdiction level base-year to report-year taxable transactions percentage change values reasonably represent economic change for their jurisdiction, then it should be discussed in their annual report to the California Department of Resources Recycling and Recovery (CalRecycle). Alternatives to relying on these taxable transactions values include:

  • Establish a regional solid waste management agency.
  • Establish a new base-year waste generation amount. With the implementation of SB 1016, CalRecycle will only accept new base year studies commenced prior to June 30, 2008.
  • Conduct a generation-based analysis (estimate diversion tons + disposal tons from the disposal reporting system for a particular year). A jurisdiction may conduct a generation study for internal review purposes; however, CalRecycle will not review it for compliance determination.
  • Use an alternative measure of economic change.
  • Use taxable transactions values for diversion rate estimate in the annual report, but rely on diversion program implementation data to show “good faith effort” to reach diversion goal. . With the implementation of SB 1016, CalRecycle no longer measures diversion rates. For 2007 and subsequent years, CalRecycle compares reported disposal tons to population to calculate per capita disposal expressed in pounds/person/day. This new goal measurement system is described in CalRecycle’s Goal Measurement: 2007 and Later web page.

Footnotes

[1] Taxable Sales In California (Sales and Use Tax): Table 5—Taxable Sales In The 272 Largest Cities, By Type of Business (Taxable Transactions: Totals All Outlets); and Table 6—Taxable Sales In All Cities Except The 272 Largest (Total Outlets: Taxable Transactions).

[2] Taxable Sales In California (Sales and  Use Tax): Table 2—Taxable Sales, By County (Taxable Transactions: Outside Incorporated Cities).

[3] Taxable Sales In California (Sales and Use Tax): Table 2 - Taxable Sales, By County (Taxable Transactions: Total).

[4] Although a portion (10.8 percent for 1999) of statewide taxable transactions reported by retailers to BOE have not been identified as belonging to a specific jurisdiction, all local and district sales tax revenue not directly allocated to specific jurisdictions by retailers is, in fact, distributed by BOE to individual counties, cities, and voter-approved special tax districts using a countywide or statewide pooling mechanism.

[5] Digital Economy 2000, U.S. Department of Commerce, p.4, Letter from Secretary William M. Daley.

[6] State Board of Equalization, 1998–99 Annual Report, p. 27-31.

[7] The sales and use tax rate beginning January 1, 2001 is comprised of: 5.75 percent State tax, 0.25 percent county tax, 1.00 percent local tax, and where applicable, a voter-approved special district tax ranging from 0.125 percent in Nevada, Solano, and Stanislaus counties to 1.25 percent in San Francisco County.

[8] California State Board of Equalization, David Hayes, Statistics Section, March 23, 2001, telephone conversation.

Last updated: September 24, 2009
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