3.3.3 Sales Tax Revenue Bonds
Sales tax revenue bonds are bonds that are payable from and secured by revenues from the imposition of a sales and use tax, or a transaction and use tax, on retail transactions within the issuer’s boundaries. These revenues are collected by the California State Board of Equalization and remitted to the issuer. The principal challenge with sales tax revenue bonds is obtaining the voter approval required for the imposition of the tax. Sales and use taxes are paid by all retail buyers within the issuer’s jurisdiction and obtaining the required vote requires broadbased public support.
PRINCIPAL USES – While sales tax revenue bonds may be used for general purposes, depending on the nature of the tax and public agency collecting them, sales tax revenue bonds are particularly useful for financing projects that will not generate revenues sufficient to cover the project’s operating costs and debt service. Sales tax revenue bonds are often used to finance transportation facilities, especially highways and mass transit facilities.
PRINCIPAL ISSUERS – Only public agencies with the authority to impose a sales tax may issue sales tax revenue bonds. Although cities and counties do issue sales tax revenue bonds, most sales tax revenue bonds are issued by local transportation authorities.
LEGAL AUTHORITY – A public agency’s authority to impose a sales tax is derived from its governing statute and is subject to limitations imposed by that statute. Sales tax imposition is also subject to the requirements and limitations of the “Transactions and Use Tax Law” (California Government Code Sections 7251– 7279.6), including limitations on the combined sales tax rate that can be imposed in any county, and must comply with the requirements of Article XIIIC of the California Constitution. Sales and use taxes imposed by cities and counties that are not imposed for a specific purpose or purposes are general taxes, while sales and use taxes imposed for a specific purpose or purposes or by a local government entity that is not a general governmental entity (e.g., a transit district or a transportation authority) are special taxes. See Section 1.4.6, Special Taxes.
Bond issuance authority may be derived from a public agency’s governing statute. California Public Utilities Code Section 180250 et seq., for example, provides for the issuance of “limited tax bonds” payable from the proceeds of a retail transaction and use taxes imposed by local transportation authorities created or designated under the Local Transportation Authority and Improvement Act (California Public Utilities Code Section 180000 et seq.). If the bonds are secured by fare box or other revenues as well as sales tax revenues, bond issuance authority may also be derived from the Revenue Bond Law of 1941 (California Government Code Section 54300 et seq.) known as the “1941 Act.”
APPROVAL PROCESS – The imposition of general taxes and special taxes must comply with the respective procedural requirements of California Constitution Article XIIIC (i.e., two-thirds vote of the governing body, majority voter approval for general taxes, and two-thirds voter approval for special taxes). Bond issuance must be approved by the issuer’s governing board, generally by ordinance, and voter approval is also often required. Authorizing statutes may allow the tax and bond approval measures to be combined.
STRUCTURE AND DOCUMENTATION – Sales tax revenue bonds are generally issued as long term, fixed rate bonds. Once a tax rate is established, sales and use tax revenue will, over time, vary with the level of transactional activity; revenue levels are beyond the issuer’s control. Debt service “coverage,” the amount or multiple by which annual tax revenues exceed annual debt service, provides protection against fluctuations or declines in the amount of tax revenue. The provisions respecting the issuance of additional bonds secured by a particular stream of tax revenues are therefore a key structuring concern.
OTHER CONSIDERATIONS – The proceeds of bonds payable from special taxes may be expended only for the purposes approved by voters, so care must be taken in developing bond and tax measures. Local transportation authority bonds are generally issued to finance capital items in the applicable county transportation expenditure plan. Because the operating revenues of transportation agencies rarely cover the agency’s operating costs there is little likelihood that these revenues will be used to pay debt service on the bonds. Bond financed projects may, as a result, have significant “private use” without creating private activity bonds. See Section 4.6, Governmental Bonds/Private Activity Bonds.
POST-CLOSING ADMINISTRATION AND OVERSIGHT – As with GO bonds, it is essential to establish procedures to ensure that bond proceeds are expended for approved purposes.