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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



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 and on the use, storage, or other consumption of tangible personal property when sales tax is not applicable. Its original intent was to tax the sale or use of tangible personal property. The State collects Bradley‑Burns tax on behalf of cities and counties and distributes the revenue to those local governments. The statewide rate is 1.25 percent, of which 1 percent is allocated by the State to counties or incorporated cities to use at their discretion, and 0.25 percent is allocated to county local transportation funds (LTFs) to support transportation projects. As we discuss in greater detail here, Bradley‑Burns tax revenue is generally allocated to the city or county that served as the place of sale for a transaction. Revenue from sales that occur within a city’s limits is allocated to that city, and revenue from sales within a county’s unincorporated area is allocated to that county. Figure 1 illustrates how the State assesses Bradley‑Burns tax based on where and how goods are sold.

Figure 1
Assessment of Bradley-Burns Tax Depends on Several Factors

Flow chart with factors considered in assessing Bradley-Burns tax for a business.

Source: California State Auditor’s analysis of sales and use tax laws and regulations.

Note: This flowchart applies to most sales transactions; however, exceptions exist for certain sales to commercial airlines.

* A business has nexus with California if it is considered to be engaged in business in the State, as defined by Revenue and Taxation Code section 6203.

The State Board of Equalization and California Department of Tax and Fee Administration

The Legislature established the State Board of Equalization (Equalization) in 1879 to ensure that county property tax assessment practices were equal and uniform throughout the State. In 1933 Equalization assumed responsibility for administering the statewide general sales tax, and in 1956 it began administering the Bradley‑Burns tax. On July 1, 2017, the Taxpayer Transparency and Fairness Act of 2017 restructured Equalization into three separate entities: Equalization, the California Department of Tax and Fee Administration (Tax Administration), and the Office of Tax Appeals. Equalization is an independent agency that continues to administer property, alcoholic beverage, and insurance taxes. Tax Administration is a new department housed within the California Government Operations Agency and administers most of the taxes and fees previously collected by Equalization, including the Bradley‑Burns tax. The Office of Tax Appeals is an independent agency that will begin full operation and appeals hearings regarding taxes and fees administered by Tax Administration as of January 1, 2018.

Who Has "Nexus"?

Before passage of AB 155 (Chapter 313, Statutes of 2011)

Under state law, anyone engaged in business in California was responsible for collecting and remitting sales or use tax on all applicable sales of tangible personal property. The following were among the activities that constituted being engaged in business in—otherwise known as having nexus with—California:

After passage of AB 155

As of September 15, 2012, any retailer who meets the following additional criteria also has nexus with California and must therefore register with Tax Administration and collect and remit California sales taxes:

Source: Revenue and Taxation Code Section 6203.

Sales and Use Taxes in California

Subject to a number of exceptions, California imposes sales and use taxes on the retail sale or use of tangible personal property in the State. Tangible personal property means goods (not real estate) that can be seen, weighed, measured, felt, touched, or otherwise perceived by the human senses. As of January 1, 2017, the statewide sales and use tax rate is 7.25 percent. State law allocates 6 percent of this rate to the State and the remaining 1.25 percent—the Bradley‑Burns tax—to local governments. In almost every case in which state sales or use tax is applicable, the Bradley‑Burns tax is also applicable. In addition, local jurisdictions such as cities and counties can levy their own sales and use taxes, known as district taxes. Under state law, local jurisdictions may impose a rate of up to 2 percent in district taxes without requiring additional legislative approval.

When retailers sell merchandise in California, even temporarily, state law generally requires them to register with Tax Administration and remit tax on their sales. As the text box explains, retailers who have nexus with the State must remit sales tax on applicable sales. Businesses that have nexus with a local jurisdiction that levies a district tax must also collect that tax in addition to the statewide sales tax. Tax Administration reported that as of June 30, 2016, more than 949,000 retailers representing about 1.3 million business locations had registered to remit California’s sales and use taxes. In fiscal year 2015–16, California retail sales and use tax revenue totaled $54.1 billion. This included $39 billion from the state sales and use taxes, $6.2 billion from district taxes, and $7.1 billion from the Bradley‑Burns tax. About $1.6 billion in Bradley‑Burns tax revenue went to county LTFs in the same year. Figure 2 shows how Tax Administration distributes California’s sales and use taxes.

In 2011 Assembly Bill 155 (AB 155) amended the general sales and use tax law to expand the definition of nexus to include more Internet retailers, like Amazon. As a result, Internet sales of tangible personal property are generally taxable in California. Sales and use taxes, and therefore the Bradley‑Burns tax, apply to Internet sales in much the same way as they apply to sales made at retail locations, through sales representatives, over the telephone, or by mail order. As with traditional sales, the amount of tax due on Internet sales varies. If goods are delivered to a local jurisdiction with an additional district tax, then the total tax owed is the statewide rate of 7.25 percent plus the amount of the district tax.

Figure 2
California's Sales and Use Taxes Are Distributed to a Variety of Funds

Flow chart depicting the distribution of sales and use taxes to a variety of funds.

Source: California State Auditor’s synthesis of Tax Administration, Department of Finance, and California Department of Transportation guidance.

* Less administrative costs.

Out‑of‑state retailers that do not have nexus are not required to register with Tax Administration or to remit tax on sales of taxable goods delivered to buyers in California.1 In such cases, buyers are required to remit use tax to the State—specifically, to the Franchise Tax Board or Tax Administration for individuals, and to Tax Administration for businesses. Although buyers owe use tax to the State, they may not be aware of this obligation. Physical retailers charge applicable sales and use taxes at the time of sale, but online retailers do not always do so. In such cases, buyers may not understand that they are liable for paying use tax on their purchases when they submit their state tax returns, despite the State’s efforts to educate the public about their use tax liabilities.

Exemptions and Exclusions From Sales and Use Taxes

Key Exemptions and Exclusions From California's Sales and Use Taxes:

Additional Exemptions Specific to the Bradley-Burns Tax:

Source: Tax Administration, Sales and Use Taxes: Exemptions and Exclusions and Uniform Local Sales and Use Tax Regulation 1805.

Since enactment of California’s retail sales and use tax laws in the 1930s, the Legislature has granted many exemptions that remove the tax liability from sales of different types of property and by certain individuals or organizations. Other transactions are exempt because of the way in which the law defines what is taxable or because they do not involve the transfer of merchandise. The text box lists key exemptions and exclusions from California’s general sales and use taxes, which also apply to the Bradley‑Burns tax, and additional exemptions that are specific to the Bradley‑Burns tax.

Funding for Local Transportation in California

In 1971 the Legislature enacted the Mills‑Alquist Deddeh Act, also known as the Transportation Development Act (Transportation Act), to improve existing public transportation services and encourage regional transportation coordination. The Transportation Act supports a wide variety of transportation programs, including planning and program activities, pedestrian and bicycle facilities, community transit services, and rail projects. Based on figures from Tax Administration and the State Controller’s Office, we calculated that in fiscal year 2016–17, the Transportation Act generated nearly $1.9 billion for public transportation in California.

In 1972 the Transportation Act also created an LTF in each county. LTF revenue is derived solely from the 0.25 percent portion of the 1.25 percent Bradley‑Burns tax. However, as we discuss in the Audit Results, LTFs do not necessarily provide the majority of counties’ total transit service dollars. Local transit operators also rely on numerous funding sources in addition to Bradley‑Burns tax revenue, including passenger fares, other sales and use taxes, and other state and federal funding.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to audit the California Department of Tax and Fee Administration’s assessment and distribution of the LTF portion of the Bradley‑Burns tax.2 Table 1 lists the Audit Committee’s objectives and the methods we used to address them.

Table 1
Audit Objectives and the Methods Used to Address Them
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. We reviewed relevant laws, rules, regulations, and policies and procedures for assessing and distributing the Bradley‑Burns tax.
2 Evaluate how the department assesses, collects, and distributes revenue derived from the Bradley‑Burns tax and whether these processes comply with applicable laws. Also determine the following:
  • We interviewed relevant Tax Administration staff and conducted walk‑throughs of its relevant processes. We reviewed how Tax Administration assesses and collects the Bradley‑Burns tax; how it handles overpayments, underpayments, or failures to pay the Bradley‑Burns tax; and how it distributes monthly LTF advance payments to counties and reconciles them to actual quarterly revenue. We also reviewed several programs Tax Administration has adopted to promote taxpayer compliance with out‑of‑state sales, including Internet sales.

  • We obtained Tax Administration’s sales and use tax return data from its Integrated Revenue Information System (IRIS). From a sample of California Sales and Use Tax Returns we tested Tax Administration’s assessment and collection of the Bradley-Burns tax, including its efforts to ensure retailers are collecting and remitting the Bradley-Burns tax to Tax Administration. We also tested whether Tax Administration accurately distributes the appropriate amount of LTF revenue to the correct counties. We analyzed Tax Administration’s quarterly adjustment process to determine whether it accurately adjusts various counties’ fund allocations to reflect actual revenue.

  • We examined how Tax Administration ensures that online‑only retailers who have sales in California comply with Assembly Bill 155 (Chapter 313, Statutes of 2011), and identified how Tax Administration assesses the Bradley-Burns tax on Internet sales. We also analyzed how Tax Administration assesses sales and use tax, based on whether the sale or delivery of goods occurs in‑state or out‑of‑state.

  • We researched how the law applies sales and use taxes, including the Bradley-Burns tax, to Internet sales and found that Internet sales are treated the same as traditional sales.

  • We researched how other states assess similar taxes. According to the Tax Foundation, only two other states besides California levy mandatory, statewide, local add‑on sales taxes at the state level (Utah charges 1.25 percent and Virginia charges 1 percent). Both states' taxes on tangible personal property are primarily based on place of sale for sales taxes and on destination of goods for use taxes, which mirrors California's sales and use tax structures.
a. What controls are in place to ensure the collection of the Bradley-Burns tax on Internet sales.
b. How the department assesses the Bradley‑Burns tax on Internet sales, including whether the assessments differ for in‑state and out‑of‑state sales.
c. How the assessment of Internet sales taxes under the Bradley‑Burns tax compares to other Internet sales taxes within the State.
d. How California’s rules related to the assessment of the Bradley-Burns tax compare to those of similar taxes in other states.
3 Determine whether counties’ LTF revenues have varied significantly over the last five fiscal years. Determine what factors are contributing to the variations in revenue and which counties have been most affected by the funding fluctuations. Identify any other factors affecting the availability of consistent revenue into counties’ LTFs.
  • We analyzed LTF revenue that counties received during the last five fiscal years to determine whether it varied significantly over the period and to identify which counties were most affected by fluctuations.

  • We identified factors that contributed to variations by analyzing and comparing data on taxable sales, county population, industry-level sales, and adjustments to LTF allocations.
4 To the extent possible, identify trends and the likely future impact on transit services of the following:
  • We analyzed data from the U.S. Census Bureau and Tax Administration. We used Census Bureau data to calculate national retail sales and e‑commerce sales growth rates. Since no data specific to California were available, we assumed these national trends also held true for California. We did not perform data reliability procedures on the Census Bureau data, as U.S. Census data are considered to be reliable.

  • We analyzed budgets and funding sources for a selection of large transportation planning agencies to determine their sensitivity to changes in Bradley-Burns tax revenues.
a. Internet sales versus sales at retail locations within the State.
b. Sales of taxable goods and services versus nontaxable goods and services.
5 Identify all exemptions and exclusions to the Bradley-Burns 0.25 percent tax and determine whether these exemptions and exclusions have significantly affected the distribution of funds in specific areas of the State. Evaluate whether any of these exemptions and exclusions are affecting the original intent of the Bradley‑Burns tax.
  • We researched the original legislative intent of the Bradley-Burns tax.

  • We examined the Bradley-Burns tax and the general sales and use tax laws to identify all exemptions and exclusions to the taxes.

  • We researched whether exemptions to the Bradley-Burns tax have affected specific areas of the State. Based on a lack of demonstrated harm (lawsuits), analyses, and relevant data, we are unable to conclude whether the two exemptions specific to the Bradley-Burns tax has a significant impact on the distribution of funds.

  • We researched any changes to the general sales and use tax exemptions and exclusions within the last five years and did not identify any that significantly affected the distribution of Bradley-Burns tax revenue.
6 To the extent possible, determine whether increased Internet sales have benefited some areas of the State more than others.
  • In conjunction with the procedures we performed in Objectives 3 and 4, we analyzed how Internet sales affect the distribution of tax revenue to local jurisdictions.

  • We reviewed 10 retailers that sell online to determine how their business structures affected their tax allocations.
7 Review and assess any other issues that are significant to the audit. We researched whether any exemptions and exclusions to the Bradley-Burns tax have been amended within the last five years; whether they have an expiration, or sunset, date; and whether any body, legislative or otherwise, regularly revisits the appropriateness of exemptions and exclusions.

Sources: California State Auditor’s analysis of the Audit Committee’s audit request number 2017‑106, planning documents, and analysis of information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from Tax Administration’s Integrated Revenue Information System (IRIS). The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, and recommendations. Tax Administration uses IRIS to administer its tax and fee programs. For a selection of counties, we used IRIS data to determine the source of taxable sales allocations for the Bradley‑Burns tax and district taxes. We performed data set verification procedures and electronic testing of key data elements and did not identify any issues. We did not perform full accuracy and completeness testing of these data because they come from a fully paperless system, and thus, hard‑copy source documentation was not available for review. Consequently, we found the IRIS data to be of undetermined reliability. Although these determinations may affect the precision of the numbers we present, sufficient evidence exists in total to support our audit findings, conclusions, and recommendations.


1 As we discuss later in the report, some out‑of‑state retailers voluntarily register and collect use tax from California buyers. Go back to text

2 Formerly the State Board of Equalization (Equalization). During our audit state law created the California Department of Tax and Fee Administration (Tax Administration), which now handles most of the taxes and fees previously administered by Equalization, including the Bradley‑Burns tax. Hereafter we use Tax Administration to refer to the audited agency. Go back to text

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