Even if There’s a Budget Vote Soon, There Still Might Not Be Enough Time to Extend the Sales Tax

An extension of a 1 percent sales tax rate past its June 30 expiration as part of a budget deal may be not be feasible, according to a letter to legislative leaders from the Board of equalization.

In a June 6 letter, the board told legislative leaders that the shortest time to change a tax rate in the past was 15 days.

“We have over 1 million California and out-of-state retailers and other taxpayers for whom timely and accurate updates on changes to the sales and use tax and rates are highly critical,” wrote Kristine Cazadd, the board’s interim executive director.

The letter lays out what would happen if a rate extension is approved between now and the end of the month as part of a budget deal or after midnight June 30, when the 1 percent expires.

Continuation of the 1 percent, which increases the state’s share of sales tax from 5 percent to 6 percent, is part of Gov. Jerry Brown’s plan to close a $26.6 billion budget shortfall.

The Democratic governor wants to extend the sales tax and two other taxes for five years – with voter approval – to fill roughly half of the fiscal hole.

In March, Republican lawmakers refused to provide the necessary votes to place the issue before voters this month.

Now the sales tax must be extended temporarily or expire at midnight June 30.

If a rate extension is approved between now and June 30, the board says “there may be insufficient time to notify all registered retailers.”

The board does note that it has sent electronic mail notifications to 680,000 retailers about the change in the sales tax rate but, even so, “some retailers may not become aware of the rate extensions and, as a consequence, may fail to reimburse themselves for, or collect, the 1 percent tax from their customers.”

Conversely, if a budget is approved by June 30 without a rate extension, some retailers might not receive notification and continue collecting the higher tax.

“Retailers must return excess tax reimbursement to the customers from whom it was collected or remit the excess tax to the state,” the board’s letter says.

“For those retailers with a large customer base, making refunds to their customers for the excess tax would be burdensome and potentially disruptive to their business operations.”

It becomes even more complicated if a budget is passed after  June 30 containing a rate extension.

For the period from June 30 until the extension, retailers would collect at the lower rate then – after 15 days from the effective date of the extension – start collecting again at the higher rate.

“During this time of economic uncertainty, retailers already are faced with tough challenges. Uncertainty over the tax rate and whether retailers will have sufficient time to implement a rate change only contribute to these challenges.”

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