State Board of Equalization:
Proposed Lumber Tax Regulations Limit Administrative Cost Recovery for Sellers

When it approved the state's new 1 percent tax on the purchase of lumber products, the Legislature agreed to reimburse sellers for the cost of collecting the tax. However, proposed regulations advanced by Board of Equalization staff to accomplish this goal appear to shortchange taxpayers by limiting administrative cost recovery.

The new law (AB 1492, Assembly Budget Committee, Chapter 12-289) provides: "The retailer shall collect the assessment from the person at the time of sale, and may retain an amount equal to the amount of reimbursement as determined by the State Board of Equalization pursuant to regulations, for any costs associated with the collection of the assessment, to be taken on the first return or next consecutive returns until the entire reimbursement amount is retained."

The BOE's proposed Regulation 2000 limits the retailer's cost recovery in two ways: it is for "start-up" costs only, and it is limited to $250 per location.

Both of these limitations appear to be inconsistent with the statute, which refers to "any costs associated with the collection of the assessment." "Any" is not just start-up costs.

The board seeks to justify the start-up cost limit based on a legislative staff analysis of the bill that reads: "Retailers may be reimbursed for costs to set up collection systems. The fee may be itemized on receipts."

Does this legislative analysis accurately describe the provisions of the bill? If not, should it be used to interpret the bill? The bill allows retailers to collect reimbursement – it is not up to a third party to allow reimbursement, as the "may" in the staff analysis suggests.

The $250-per-site limit is based on a recent study of sales tax collection costs. According to the BOE: "Gross retail sales tax compliance costs for programming and servicing cash registers were reflected by a weighted average cost of 0.01 percent of taxable sales. The $250 amount was calculated by multiplying 0.01 percent by $2,500,000. The $2,500,000 figure was chosen because about 50 percent of lumber retail establishments in 2007 had sales of $2,500,000 or less."

This raises several questions:

• Does the bill require reimbursement for each taxpayer based on his or her administrative costs – to be determined by the board – rather than a flat amount for all?
• Is the cost of setting up this tax collection system for one item more expensive than the general cost of administration of a sales tax?
• What about the other 50 percent of retailers for whom the board estimates that the administrative cost will be higher than $250?
• Will the costs per taxpayer be different based on the type of stores that sell the lumber?
• Will the costs per taxpayer be different based on the type of "lumber product" (not yet defined) being sold?

An interesting side note to this proposed regulation is that BOE staff is trying to get reimbursement for its administrative costs. Board staff is asking the Department of Finance to approve $975,000 to implement the new tax. This administrative cost represents approximately 2.8 percent of the expected revenue of $35 million, and this is more than the 0.01 percent of taxable sales that the BOE staff believes is the retailer's administrative cost.

In other BOE news:

Fire Tax Apology to Be Mailed to 3,970 Property Owners. Next week, the Board of Equalization will begin mailing apology letters to 3,970 property owners who received an erroneous advance notice that their property was subject to the new state fire tax for the 2011-12 fiscal year.

The California Department of Forestry and Fire Protection used a third-party vendor to identify properties that will be subject to the controversial tax, and the vendor wrongly identified the 3,970 properties as being in "state responsibility areas" subject to the tax. Because the properties are not in a state responsibility area, the property owners are not going to receive a bill for the fire tax after all.

For more information on the administrative inferno that the fire tax has caused, see the October 5 issue of the CalTaxletter.

October 19, 2012
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