AB 2522 creates a temporary state sales and use tax exemption for over‑the‑counter (OTC) medications. The bill ties the definition of covered products to FDA regulation and frames the exemption as a tax policy tool to align the tax treatment of OTC products with prescription drugs.
The legislation also builds in performance tracking: the Legislature sets goals and measurable indicators and requires the tax agency to report on exempted transactions and taxes forgone. The change is structured as a state tax levy and contains carve‑outs that limit effects on locally imposed sales taxes.
At a Glance
What It Does
The bill exempts sales, storage, and use of FDA‑regulated nonprescription drugs from California state sales and use tax for a limited period and requires the department to report annually on the number and value of exempt transactions. It defines covered products by reference to federal regulation rather than a product list.
Who It Affects
Retailers that sell OTC medicines (pharmacies, big‑box retailers, grocery chains, online sellers) must adjust point‑of‑sale coding and accounting to reflect the exemption. Consumers buying OTC drugs benefit directly. The California Department of Tax and Fee Administration (CDTFA) must track and report exempt transactions.
Why It Matters
This is a targeted tax expenditure that shifts some consumption cost from consumers to the state budget and creates operational and compliance work for sellers and tax administrators. Because the bill carves out local and certain dedicated rates, the revenue impact concentrates at the state level.
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What This Bill Actually Does
The bill adds a new section to the Revenue and Taxation Code that defines “over‑the‑counter medication” by reference to federal law: nonprescription drugs regulated under the federal Food, Drug, and Cosmetic Act and implementing FDA regulations. Using the FDA definition avoids an item‑by‑item list but creates reliance on federal classifications that can differ from how retailers catalogue products.
Under the new section, gross receipts from sales and the storage, use, or consumption of those FDA‑regulated OTC drugs are exempt from the state sales and use tax. The exemption is written to apply to state levies only; the bill explicitly preserves local sales and transactions taxes and excludes state rates dedicated for local funding (including revenues routed to Local Revenue Fund 2011).
That means county, city, and district taxes remain collectible at the local level, and certain state‑imposed rates earmarked for local purposes are not reduced by this exemption.The Legislature also inserts statutory findings establishing the policy goal—creating parity between prescription and OTC medications—and prescribes two performance indicators: the number of exempt transactions and the aggregate dollar value of taxes forgone. The department must produce a report no later than January 1, 2028, and then annually on January 1 thereafter, with the report formatted to meet Government Code reporting rules.
Finally, the exemption is temporary: the statute sunsets on January 1, 2032, and the act takes immediate effect as a tax levy.
The Five Things You Need to Know
The bill ties the definition of covered OTC medicines to FDA regulation (federal Food, Drug, and Cosmetic Act and related regulations) rather than an enumerated product list.
Local sales and use taxes and district transactions taxes are not affected—the exemption applies only to state sales and use taxes.
State tax rates whose revenues are dedicated for local funding (including deposits to the Local Revenue Fund 2011) are explicitly excluded from the exemption.
The Department must deliver the first statutory report on exempt transactions and taxes forgone by January 1, 2028, and then publish that report annually.
The exemption is temporary: it expires and is repealed effective January 1, 2032, and the bill goes into immediate effect as a tax levy.
Section-by-Section Breakdown
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Definition of over‑the‑counter medication
The bill uses a regulatory hook: an OTC medication is any nonprescription drug regulated by the FDA under the federal Food, Drug, and Cosmetic Act and implementing federal regulations (including relevant CFR provisions). Practically, that channels product coverage to federal determinations, which simplifies the statute but shifts the burden of line‑drawing to FDA product classifications and to retailers that must map inventory to those categories.
State sales and use tax exemption
This subdivision creates the substantive exemption: gross receipts from sales in California and the storage, use, or consumption of the defined OTC medications are excluded from the taxes imposed by the Sales and Use Tax Law. For sellers, the exemption affects taxable basis calculations and requires systems changes to prevent state tax from being collected on qualifying items.
Carve‑outs for local and dedicated rates
Two separate clauses preserve existing local revenue streams: the exemption does not reduce taxes levied under the Bradley‑Burns local sales tax framework or transactions and use taxes imposed by districts, and it does not apply to state rates whose proceeds are dedicated for local purposes (including amounts deposited to Local Revenue Fund 2011). The drafting keeps local receipts whole while concentrating the fiscal impact at the state level.
Statutory goals and reporting requirements
The Legislature declares the policy objective—tax parity between prescription and OTC medicines—and prescribes two performance indicators: count of exempt transactions and total taxes forgone. The Department must report annually starting January 1, 2028, consistent with Government Code reporting standards. That reporting requirement creates a discrete data stream the Legislature can use to measure uptake and fiscal cost.
Sunset and tax levy status
The exemption is temporary and automatically repeals on January 1, 2032, limiting the program to roughly a six‑year window. The act is declared a tax levy to trigger immediate effect under the state Constitution, which means the exemption applies as soon as the law takes effect rather than waiting for a future operative date.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Consumers who purchase OTC medications — they pay no state sales tax on qualifying nonprescription drugs, lowering out‑of‑pocket costs for routine treatments.
- Retailers selling OTC drugs (pharmacies, supermarkets, mass merchandisers, online sellers) — potential sales increases and customer goodwill, though they also must implement POS changes.
- Low‑income households and price‑sensitive patients — removing state tax reduces the regressive burden of sales taxes on essential health items.
Who Bears the Cost
- California state general fund — the exemption reduces state sales tax receipts (local and certain dedicated receipts are preserved), creating fiscal pressure elsewhere in the budget.
- Department of Tax and Fee Administration (CDTFA) — the agency must adapt guidance, reporting systems, and enforcement procedures to track exempt transactions and taxes forgone.
- Retailers and point‑of‑sale vendors — vendors must reclassify SKUs, update tax tables, and maintain supporting documentation to substantiate exempt sales, creating one‑time and ongoing compliance costs.
Key Issues
The Core Tension
The bill tries to make essential OTC medicines more affordable (aligning them with tax‑exempt prescription drugs) while avoiding disruption to local revenues; that choice reduces local pushback but forces the state budget to absorb the cost and shifts administrative burdens onto sellers and the tax agency—trading distributional relief for fiscal and implementation complexity with no direct measures of public‑health impact.
Linking the exemption to FDA regulation avoids an exhaustive product list but introduces classification complexity. Many consumer items sit at the margins—cosmetics, dietary supplements, medical devices, and combination products can be regulated differently at the federal level or fall into multiple categories.
Retailers will have to determine whether an SKU is an FDA‑regulated nonprescription drug and document that decision for audits, which raises inventory coding, training, and point‑of‑sale challenges. Expect disputes in audits over borderline products and increased demand for administrative guidance from the tax agency.
The bill protects local tax receipts, concentrating the fiscal impact at the state level. That design reduces local political resistance but creates a funding trade‑off: state resources must absorb revenue losses while local governments and programs funded through dedicated state rates (e.g., Local Revenue Fund 2011 allocations) remain unaffected.
The bill’s performance metrics—transaction counts and taxes forgone—measure fiscal uptake but do not capture outcomes policymakers often target with health‑related tax changes, such as changes in access, adherence, or reductions in health disparities. Those absence of outcome metrics limits evidence about whether the exemption advances health objectives versus primarily providing a fiscal subsidy to consumers.
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