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Report Number: 2017-106


The Bradley-Burns Tax and Local Transportation Funds
Changing the Allocation Structure for the Bradley‑Burns Tax Would Result in a More Equitable Distribution of Local Transportation Funding

November 30, 2017 2017-106

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning how the Bradley-Burns Uniform Local Sales and Use Tax (tax) is assessed, collected, allocated, and distributed to local transportation funds (LTFs). The tax charges 1.25 percent on the retail sale or use of tangible personal property in the State, of which 1 percent is allocated to counties or incorporated cities to use at their discretion and the other 0.25 percent is allocated to county LTFs. This report concludes that changing the allocation structure for the tax would result in a more equitable distribution of local transportation funding.

Revenue from the tax is generally allocated to the city or county that served as the place of sale for a transaction. However, retailers that make Internet sales or ship goods to customers across jurisdictional borders may identify the place of sale as one of their warehouses, which concentrates the tax’s revenue into those warehouses’ jurisdictions. Consequently, counties with relatively large numbers of warehouses generally receive disproportionately larger amounts of the tax’s revenue and therefore LTF funding. The State could make the distribution of the tax more equitable by amending the Bradley-Burns tax law so that revenues derived from Internet sales are allocated based on the destination of sold goods rather than their place of sale.

Further, the State does not regularly review the costs and benefits of its tax exclusions, tax exemptions, preferential tax rates, tax credits, and other tax provisions (tax expenditures), which reduce the amount of revenue the State collects. By not routinely reviewing tax expenditures, the Legislature is missing an opportunity to exert budgetary control over a significant portion of the State’s potential spending. Removing certain tax exemptions, taxing digital goods, and taxing services could increase revenue for both LTFs and the State generally.

We also found that the California Department of Tax and Fee Administration (Tax Administration) has adequately administered the tax. However, to help address California’s e-commerce tax gap and ensure out‑of‑state retailers’ compliance with state law, Tax Administration should implement a two‑year pilot of its authorized, but never funded, reward program for information resulting in the identification of unreported sales and use taxes.

Respectfully submitted,

State Auditor

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