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"California Legislative Tax Alert - 12 Month Exemption"

Tax Alert - 12 Month Exemption

January 20, 2006

Governor's Budget Extends Unwanted Use Tax Exemption

Sacramento - Aircraft and vessel dealers, brokers, salesmen, purchasers and interested parties better start paying attention to this year's State Budget process. Governor Arnold Schwarzenegger's 2006-2007 budget deceitfully proposes to continue the use tax exemption on aircraft, vessels, and vehicles brought into California within a year of purchase.

California Revenue and Taxation (R&T) Code Section 6248, which has operated since October 2004, establishes a 12 month time period in which the owner of an aircraft, vessel, or vehicle purchased outside of California must generally remain outside the State in order to be exempt from the use tax. This provision is set to revert back to its original 90 day exemption, July 1, 2006.

Unfortunately, a little-noticed tax revenue highlight in the Republican Governor's proposed budget would extend this burdensome exemption through July 1, 2007.

Present figures indicate, that sales and use tax is California's second largest revenue source. Although the Department of Finance projects that the Governor's proposed extension would bring in an additional $35 million dollars in revenue, it is our opinion these figures are over estimated.  Either way, that's approximately one tenth of one percent of an estimated $28.3 billion in sales and use tax revenue forecasted for 2006-07.

Arguably, the Governor's revenue estimates from this proposed exemption have yet to be substantiated. In 2004, Senate Bill 1100, which enacted this 12-month exemption provision, also provided that a cost analysis study be conducted by the Legislative Analyst Office (LAO) and presented to the California Legislature by June 30, 2006. The report would study the economic impacts of this exemption and determine whether the additional revenue forecasted by both Legislative Appropriations committees is valid. Therefore, without the LAO's finished report, one can only speculate on the success or failure of this exemption.

Moreover, the extension the Governor is supporting will undoubtedly hurt California based companies and the consumers they serve. It has been our observation that this unfriendly tax change has driven dealers/manufacturers out of California or out of business. Simply, clients and consumers are taking their money and business outside the State to avoid California's stringent exemption law. Potentially costing California millions of dollars in sales and use tax that may have otherwise been paid had they chose to buy in California.

The Senate Budget and Fiscal Review committee will be conducting a hearing, Thursday, January 26, 2006, in room 4203 at the State Capitol to give an overview of the Governor's proposed budget. This is the first of many the Senate and the Assembly Budget committees will be conducting over the next four to five months.

ASTC's Government Affairs team has been tracking this issue since its inception and we'll continue to strongly oppose any legislation which eliminates tax-planning opportunities for all California based companies.

Watch for further information and alerts as the Governor's budget moves through the legislative process.

Associated Sales Tax Consultants, Inc.
Telephone:  916.369.1200
Facsimile: 916.369.6408
...A Professional Tax Consulting Firm...
...180 Degrees From Ordinary!

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