California Tax on Services? Language of Tax Unveiled
Three weeks ago we cautioned everyone to pay close attention to the proposed new $10B service tax in California under SB 8 (Hertzberg – Los Angeles). At that time, we had no actual language, but only general language of “legislative intent.” Just days ago, the bill was amended to include the language for imposition of tax on services.
The language is short and as follows:
Chapter 3.8. Services
6305. In addition to the taxes imposed by this part, for the privilege of selling services at retail a tax is hereby imposed upon all retailers at the rate of ____ percent of the gross receipts of any retailer from the sale of all services sold at retail in this state on or after January 1, ____.
6306. In addition to the taxes imposed by this part an excise tax is hereby imposed on the receipt of the benefit of the service in this state of services on or after January 1, ____, at the rate specified in Section 6305 of the sales price of the services.
On its face, the language appears relatively benign. However, the proverbial iceberg lies below the surface.
The first section is all about imposition of a tax on services. Interestingly, however, there is no definition of what constitutes “services.” Could it be that the broad brush of “services” is too difficult to define? Is that why in some states that tax services, the tax applies only to “enumerated” services?
Further, what about the true object of the contract test under Reg. 1501? If the true object is tangible personal property, then all the services related thereto are included as part of gross receipts. Under this language, will those services be taxable under Reg. 1501 as well as under this new services tax? And what about intangibles? California has its famous “technology transfer” statute that defines a TTA as intangible even though a portion of a TTA has a tangible component. Will the new services tax impact TTAs?
Then there is the second part of the bill, § 6306, which is potentially more onerous and more administratively infeasible than the first. Note that the “receipt of the benefit of the services” in California will be subject to tax. This is similar to the protection of the sales tax base on tangible personal property with a complementary use tax. However, how do you define receipt of the benefit? If the receipt is in the form of an emailed report to the California recipient (i.e. in an intangible form), is the report subject to this new excise tax? Administratively how does the state police and collect this tax?
Continue to keep your eyes open. This is just the beginning of what promises to be the California tax battle of the year.