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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



Our review of the Bradley‑Burns tax and LTFs revealed the following:

Results in Brief

Since 1956 the Bradley‑Burns Uniform Local Sales and Use Tax Law has imposed a tax (Bradley‑Burns tax) on the retail sale of merchandise or goods within the State. The State collects the Bradley‑Burns tax on behalf of cities and counties, and distributes the revenue to those local governments. The statewide rate is 1.25 percent; the State allocates 1 percent of the 1.25 percent tax to counties or incorporated cities to use at their discretion, and the other 0.25 percent to counties to support transportation programs. Since 1972 the 0.25 percent has been distributed to local transportation funds (LTFs) in each county. Counties use these LTFs to operate their local transportation programs. We found that Bradley‑Burns tax distributions to LTFs steadily increased over the last five years. However, it is important to note that LTFs are not necessarily the most significant factor in local transit funding. Other sources of revenue, including district sales and use taxes, can play a larger role in counties’ transit budgets.

Moreover, some counties may benefit disproportionately from the Bradley‑Burns tax because of the way state law currently directs the allocation of the funds. Retailers generally allocate Bradley‑Burns tax revenue based on the place of sale, which they identify according to their business structure. However, retailers that make sales over the Internet may allocate sales to various locations, including their warehouses, distribution center, or sales offices. This approach tends to concentrate Bradley‑Burns tax revenue into the warehouses’ or sales offices’ respective jurisdictions. Consequently, counties with a relatively large amount of industrial space may receive disproportionately larger amounts of Bradley‑Burns tax, and therefore LTF, revenue. The State could make its distribution of Bradley‑Burns tax revenue derived from online sales more equitable if it based allocations of the tax on the destinations to which goods are shipped rather than on place of sale.

In addition, e‑commerce is growing and is a significant factor in California’s tax gap, which affects the amount of Bradley‑Burns tax revenue that local jurisdictions receive. Tax gap refers to the difference between the amount of tax individuals and retailers owe versus the amount they remit to the State. The California Department of Tax and Fee Administration (Tax Administration) reported that California retail sales and use tax revenue totaled more than $54 billion in fiscal year 2015–16, and it estimated the fiscal year 2009–10 tax gap was about $2.3 billion. Because state law does not require e‑commerce retailers without a California connection, or nexus, to remit California sales tax, e‑commerce contributes significantly to California’s tax gap. If the State were able to eliminate the e‑commerce tax gap, it could have collected at least an additional $50 million in LTF funding, or about $864,000 per county, in fiscal year 2016–17.

The State could also increase its revenue—including LTF funding—by routinely reviewing tax expenditures, which are tax exclusions, tax exemptions, preferential tax rates, tax credits, and other tax provisions that reduce the amount of tax revenue the State collects. Tax expenditures decrease the amount of available state revenue in much the same way as direct spending. According to the Center on Budget and Policy Priorities, most tax expenditures are written into statute and continue indefinitely unless repealed. Nonetheless, neither the Legislature, Tax Administration, nor any other state entity currently reviews the costs and benefits of tax expenditures to ensure that they are in the State’s continued best interest. By not routinely reviewing exemptions, exclusions, and other tax expenditures, the Legislature has missed an opportunity to exert budgetary control over a significant portion of the State’s potential spending.

The State could increase both LTF funding and other sales and use tax revenue by removing certain tax exemptions, taxing digital goods, and taxing services. However, each option would require careful study as it would constitute a major shift in the State’s tax policy. Based on Tax Administration's figures, we calculated that sales and use tax exemptions alone are worth about $22.5 billion annually—an amount equal to 12 percent of the State’s fiscal year 2017–18 budget. Although the removal of exemptions for basic necessities such as food products is unlikely, removing exemptions for items such as candy, snack foods, custom computer programs, the lease of motion picture and television film and tapes, and the rental of linen supplies together could generate more than $1.6 billion in annual tax revenue and over $104 million in LTF funding. Similarly, taxing digital goods—such as e‑books, downloadable software, and online products—could also increase the amount of Bradley‑Burns tax the State collects. The largest increase to the tax base would involve taxing services. However, defining what services should be subject to tax is difficult. Other states have considered taxing nonmedical personal services, home repair services, funeral services, computer maintenance services, and more; but as of June 2017, none had enacted such changes.

Finally, our review found that Tax Administration has adequately administered the Bradley‑Burns tax. Specifically, it has made reasonable efforts to close the tax gap by increasing out‑of‑state retailers’ compliance with registration requirements for sales and use taxes. It has also appropriately assessed, collected, and distributed LTF revenues to counties. Although there are inherent limitations to Tax Administration’s ability to verify the amount of Bradley‑Burns tax owed by retailers, Tax Administration asserts that it routinely conducts audits of large businesses to ensure that they file accurate tax returns. Lastly, Tax Administration has the authority to operate a reward program for information resulting in the identification of unreported sales and use taxes, but has never implemented it due to concerns about whether its benefits would outweigh its costs.

Summary of Recommendations


To ensure that Bradley-Burns tax revenue is more evenly distributed, the Legislature should amend the Bradley‑Burns tax law to allocate revenues from Internet sales based on the destination of sold goods rather than their place of sale.

To increase budgetary control and ensure it has the information necessary to make decisions that reflect the State’s best interests, the Legislature should regularly review and evaluate tax expenditures, including exemptions and exclusions to the Bradley‑Burns tax and general sales and use taxes, by:

To increase the tax bases for the general sales and use taxes and the Bradley‑Burns tax, the Legislature should amend state law to specify that digital goods are taxable.

California Department of Tax and Fee Administration

To address California’s e‑commerce tax gap and further ensure out‑of‑state retailers’ compliance with state law regarding nexus—meaning a retailer’s tax relationship with California—Tax Administration should implement a two‑year pilot of its authorized reward program for information resulting in the identification of unreported sales and use taxes.

Agency Comments

Tax Administration said in its response that it appreciates our recommendation to implement a pilot of its authorized reward program and will explore the feasibility of doing so.

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