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HomeMy WebLinkAboutItem 4.05 Support AB866&SB602 . e CITY OF DUBLIN AGENDA STATEMENT CITY COUNCIL MEETING DATE: April 10, 1995 SUBJECT: City Council Support For AD 866 and SB 602 Which Would Change The Method Used To Allocate Sales Tax On Leased Vehicle Purchases (H8Prepared by: Paul S. Rankin, Assistant City Manager) EXHIBITS A TT ACHED ('1. Copy of SB 602. (Both Bills Were Identical As Introduced SB 602 was amended March 27,1995.) / 2. Draft Letter To Senator Boatwright and Assemblyman Rainey requesting their support of these measures. RECOMMENDATION ~ (1) Receive Staff Report. (2) Authorize the Mayor to execute the letters seeking support for the legislation on behalf of the City Council. FINANCIAL STATEMENT: If the law were amended it is anticipated that the City of Dublin would benefit from increased Sales Tax Revenues. Currently retail sales transactions involving leased automobiles are occurring at local dealers, however, the tax is allocated to other areas through county sales tax pools which are not based upon the "point-of-sale". DESCRIPTION: A significant portion of the City of Dublin Sales Tax in the past has been attributable to successful Auto Dealerships. In recent years a trend has developed where increasing numbers of consumers began leasing instead of purchasing automobiles. Although the percentage of lease transactions varies between the different manufacturers, industry experts project that 1 in 3 vehicles will be leased in the next two years and over 50% by the year 2000. The current methodology used to allocate sales tax on lease transactions different than if a sale occurs. Due to this difference local sales tax revenue derived from automobile dealerships is deteriorating and does not directly reflect the sales volume occurring at the dealer. In a typical retail sales transaction the State Board of Equalization allocates the local portion of the Sales Tax on a "Point.of Sale" basis. In the case of an auto purchase this would typically be at the dealership. The City of Dublin receives 1 % of the total sales tax collected. The State Board of Equalization also deducts certain amounts of total local revenues for collection and administrative charges. When a vehicle is leased a calculation is made of a "Use Tax" which is treated significantly different than a retail sales transaction. Although the consumer may have the option of electing to pay the entire sales tax up front this method is rarely used. A "Use Tax" is calculated based upon the monthly lease payment and results in lower up front costs to the consumer. The current policy used by the State Board of Equalization to allocate in the "Use Tax", is to place it in a County Sales Tax Pool. The County pool receiving the revenue is the County where the leasee resides. The concept of a lease is really a function of how a consumer decides to finance a purchase. In most cases the customer shops for the vehicle, at a dealership where the vehicle and its options are selected. The customer negotiates a price and a written contract is made. At the conclusion of the transaction the terms of a purchase or lease are discussed. As noted above, the current policy of the State Board of Equalization has been to allocate "use taxes" attributable to lease transactions to County Sales Tax Pools. This ignores the business aspects of the transaction and the fact that a dealership acts as the "point-of- sale" . lTEMNO.-.!J., COPIES TO: Lloyd de Llamas, HdL Sales Tax Consultants Judi Smith, League of California Cities CITY CLERK FILE ~ . e This process circumvents the original intended purpose of County Sales Tax Pools. The sales tax pool concept was established for cases where the "Point -of-Sale" was difficult to track. It is appears rather obvious that the Point-of-Sale for a leased vehicle is the dealership where the vehicle was selected, the price negotiated, and the lease consummated. The monies collected within the County Sales Tax Pools are allocated based on a percentage of the SaleslUse Tax each agency has within the total collected in the County. In 1993 the City of Dublin represented approximately 4.19% of the County Pool. The increasing allocation of taxes to the shared pool dilutes local agency options to maintain the current tax base. Identical bills have been introduced by Senator Wright (SB 602) and Assemblyman Aguiar (AB 866). The Senate bill was amended March 27, 1995 to clarify the intended method of allocating the taxes. Local Agency representatives anticipate further amendments in order to assure that an appropriate process is developed which can be administered by the State Board of Equalization. The passage of the bills is intended to modify the reporting for use tax collected on automobile leases. A copy of the Senate version is attached as Exhibit 1 for your review. The measure would provide that the "use tax" on leased vehicles would apply similar to a "Point-of.Sale" transaction at the location where the lease was negotiated. An exception is provided in the event that the lease was with an out-of-state lessor. In addition, the recent amendments clarify that it would not be applicable in cases where the leasing agent is not solely affiliated with the auto dealership. As noted in a recent analysis by the League of California Cities, the legislation will not affect the total tax dollars available. It will merely change the allocation between taxing jurisdictions. The City of Dublin sales tax revenues between Fiscal Year 1990/91 aDd 1993/94 have only increased by 2.23%. During this same period the rate of inflation has increased by more than 9.5%. Although factors other than the treatment of automobile leases may have been a factor, the declining local "point-of.sale" revenue attributable to the new automobile sales businesses are an important part of the local economy. If this financing trend continues there may be further deterioration of the sales tax revenue generated from this business sector. Staff has analyzed the data for the four quarters of retail sales occurring between October 1993 through September 1994. During this period $4,554,034 of retail sales tax was generated from five major business groups in the City of Dublin. The Autos and Transportation Group represented 31 % ($1,425,250) of the total sales tax collected from the five largest selected business sectors. Although this category includes outlets in addition to new auto dealerships, the auto dealer sales are anticipated to comprise a large percentage of the sales for this sector. (State Laws based upon the current number of new automobile outlets in the City of Dublin, do not allow the City to disclose the revenues generated solely from New Motor Vehicle Dealers.) The impact of the legislative proposal could be significant given that future trends would suggest declining revenues for the City from these businesses as the number of lease transactions increase. The Senate Revenue and Taxation Committee is scheduled to conduct a hearing on SB 602 on April 19, 1995. Senator Boatwright is a member of this Committee. On the same date the Assembly Local Government Committee, will review AD 866. Assemblyman Richard Rainey is the Chairman of this Committee. Staff has prepared a Draft letter to each of the local officials seeking their support and leadership in the passage of this amendment to the current sales tax allocation process. 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'-. ~ ... .._.,...~__~___ _r~_ .~ .-- ." ~...- -- ..- , Zxhihii 1. e e DRAFT LETTER FOR CITY COUNCIL CONSIDERATION The Honorable Daniel Boatwright Senator 7th District State Capitol- Room 3086 Sacramento, CA 95814 The Honorable Richard Rainey Assemblyman 15th District State Capitol- Room 4139 Sacramento, CA 95814 Re: SB 602 (Wright) Allocation of Sales Tax on Leased Vehicle Purchases Committee Hearing: April 19, 1995 (Revenue & Taxation) Re: AB 866 (Aguiar) Allocation of Sales Tax on Leased Vehicle Purchases Committee Hearing: April 19, 1995 (Local Government) Dear The purpose of this letter is to seek your support and leadership in obtaining the passage of the legislation referenced above. This item was considered by the entire Dublin City Council at their meeting on April 1 0, 1995. The issue is considered to be of great importance to the economic vitality of our community. As you are aware, over the past several years local governments have been subjected to various legislative actions which have eroded our financial base to provide basic public services. The legislative intent addressed by both SB 602 and AB 866 is the deterioration of the local sales tax revenue source. This is being impacted by new options in the method used by consumers to finance the purchase of new automobiles. In recent years there has been a trend for consumers to lease rather than purchase new automobiles. Based upon the current State Board of Equalization allocation methods, the "Use Tax" paid on a lease is allocated to a County Pool in the County where the leasee resides. This ignores the fact that in reality, often the "Point-of-Sale" is the dealership where the leased vehicle was selected, the price negotiated and the lease consummated. Some experts project that as many as one in three new automobiles will be leased in the next two years, and that the leasing rate could reach 50% by the year 2000. These trends would suggest that the City of Dublin will continue to see the deterioration of this important local revenue source. Passage of this legislation will also provide for allocation practices which are more consistent with the Bradley-Burns Uniform Sales and Use Tax law adopted by the State in 1955. Under this law, the original purpose of a County Sales Tax Pool concept was to apply to cases where the "Point-of-Sale" was difficult to track. The inclusion of automobile leases as these transactions presently take place, does not appear to fit this description. iFnil~iJBli~ ~ ~1 i.~~ I Lj'l&Ui., . e e Sales Tax is an important revenue source for the City of Dublin, and it assists in funding local public services. The current allocation methods affect this revenue source simply due to new consumer trends in the methods used to finance these purchases. It is our belief that the adjustment proposed in both SB 602 and AB 866 will correct the unintended consequences of this trend. On behalf of the entire Dublin City Council, I encourage you, as our local legislator, to support the passage of this legislation when it is considered by your Committee. We recognize that this legislation is just beginning the Legislative Review process and may be subject to amendments which will clarify the eventual administration by the State Board of Equalization. It is our hope that our elected representatives at the State Board of Equalization will join in the process to cooperatively implement the desired changes. Further, your leadership and assistance with the eventual passage into law will be of great significance to your Dublin constituents. In the event that you or your Staff have any questions regarding our position, please feel free to have them contact Paul S. Rankin, Assistant City Manager. at (510) 833-6640. Sincerely, Guy S. Houston Mayor cc: Johan Klehs, Chairman - State Board of Equalization Senator Wright Senator Aguiar City Councilmembers President. Dublin Chamber of Commerce Nancy Feeley, Dublin Chamber of Commerce psr/lss g;agenda/autoleas.doc.