BILL ANALYSIS
AB 546
Page 1
Date of Hearing: May 4, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 546 (Knight) - As Introduced: February 25, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: manufacturing
equipment: photovoltaic panels
SUMMARY : Provides a state sales and use tax (SUT) exemption for
tangible personal property (TPP) purchased for use primarily in
any stage of the manufacturing of solar photovoltaic panels.
Specifically, this bill :
1)Defines "manufacturing" as "the activity of converting or
conditioning property by changing the form, composition,
quality, or character of the property for sale at retail or
for use in the manufacturing of a product to be sold at
retail." Includes any improvements to TPP that result in a
greater service life or greater functionality than that of the
original property.
2)Defines "TPP" to include "machinery and equipment, including
component parts and contrivances such as belts, shafts, moving
parts, and operating structures."
3)Provides that no exemption shall be allowed unless the
purchaser furnishes the retailer with an exemption
certificate, completed in accordance with any instruction or
regulation issued by the Board of Equalization (BOE), and the
retailer subsequently furnishes BOE with a copy. The
exemption certificate shall contain the purchase price of the
exempt machinery or equipment.
4)Provides that the exemption shall not apply with respect to
taxes imposed pursuant to:
a) The Bradley-Burns Uniform Local SUT Law;
b) The Transactions and Use Tax Law;
c) Revenue and Taxation Code (R&TC) Sections 6051.2 and
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6201.2 (Local Revenue Fund);
d) R&TC Sections 6051.5 and 6201.5 (Fiscal Recovery Fund);
or,
e) Section 35 of Article XIII of the California
Constitution (Local Public Safety Fund).
5)Takes immediate effect as a tax levy, but becomes operative on
the first day of the first calendar quarter beginning more
than 90 days after its effective date.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
gross receipts from sales of TPP in this state.
2)Imposes a use tax on the storage, use, or other consumption in
this state of TPP purchased from any retailer for storage,
use, or other consumption in this state, absent a specific
exemption.
3)Provides no special tax treatment for purchases of machinery
or equipment used in manufacturing.
FISCAL EFFECT : BOE estimates that this bill will result in
revenue losses of $7.5 million annually.
COMMENTS :
1)The author states:
"California often is seen at the forefront of green
technology, policy, and industry. What is unfortunate is
that while we may tout the wonderful properties and push
policy, such as AB 32 (that our utility companies can't
meet), we lack leadership in the manufacturing of
photovoltaic panels. Instead, our power is shipped to us
from neighboring states, with the possibility of it coming
from as far away as British Columbia. Purchasing
out-of-state power is a necessity due to not having enough
power plants in California to support our residents. So
instead of encouraging manufacturing businesses to stay in
California, making it one less item shipped to here to make
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us 'green', we lose businesses that began with their roots
in California, to neighboring states. When we lose those
businesses, California loses jobs . It is expected that we
will lose nine solar manufacturing businesses from
California to Arizona which equals approximately 3,000 lost
jobs . We are also at a disadvantage because our
neighboring states of Oregon, New Mexico and Arizona, have
a host of incentives and programs which welcome new
businesses, nurture existing businesses and look to
continue profiting by providing California with energy. It
is time that we become self-sufficient and it starts with
the manufacturing and placement of solar here in
California."
2)Opponents state, "None of these costs should come from the
general fund. The solar industry is already heavily
subsidized by California ratepayers and federal taxpayers, and
should not be subsidized by the many demands on the general
fund, if indeed any subsidies are required at all."
3)BOE notes:
a) Partial exemptions complicate administration .
"Currently, most sales and use tax exemptions are applied
to the total applicable sales and use tax. However, there
are currently a few partial exemptions in California law,
where only the state tax portion (6.25%) of the state and
local sales and use tax rate is exempted, such as sales and
purchases of teleproduction equipment and farm equipment.
These partial exemptions are difficult for both retailers
and the Board. They complicate return preparation and
return processing. And, errors on returns attributable to
these partial exemptions occur frequently, which result in
additional return processing workload for the Board."
"This measure proposes a 6% exemption, which would add a new
exemption category (since current law does not have any
partial 6% exemptions). This would require a revision to
the sales and use tax return and result in a new, separate
computation on the return. Some retailers would have to
segregate in their records sales subject to this 6% partial
exemption, sales with a complete exemption (such as a sale
for resale or a sale in interstate commerce), and sales
that are fully taxable. This proposed 6% exemption would
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add a new level of complexity, which would create a
corresponding increase in errors in reporting the tax to
the Board. This increase in errors would further
complicate the Board's administration of the sales and use
tax law and complicate reporting obligations of retailers."
b) Machinery and equipment should be clearly defined . "In
order to avoid any uncertainty in determining the scope of
the proposed exemption, it is recommended that the bill
incorporate a definition of the machinery and equipment
intended to be included. For example, would only those
items for which a deduction for depreciation is allowed
qualify? Would such items as supplies, hand tools, or data
processing equipment qualify? Would component parts of a
prototype qualify?"
4)Committee Staff Notes:
a) This bill's purpose : Committee staff understand that
the author wants to encourage the production of solar
panels by providing a partial SUT exemption for equipment
used in the manufacturing process. Under current law,
sales tax applies to manufacturing equipment in the same
manner as it does to other TPP. Many economists have
argued that it makes little sense to tax equipment used in
the manufacturing process. Indeed, if a company buys
manufacturing equipment subject to SUT, the tax will
ostensibly be incorporated into the cost of the end product
sold, which is normally also subject to SUT.
b) What does "primarily" mean exactly? : As noted above,
this bill provides a state SUT exemption for TPP purchased
for use primarily in any stage of the manufacturing of
solar photovoltaic panels. This bill, however, provides no
guidance on what is meant by this term. If a manufacturer
were to purchase TPP with the intention of using it at
least 50% of the time to fabricate solar cells, would the
TPP qualify for the exemption? Moreover, what would happen
if the TPP were purchased with this intent, and three
months later used for a different "primary" purpose?
c) Related Legislation :
i) AB 1681 (Houston) of the 2007-08 Legislative Session
would have provided a state SUT exemption for purchases
of qualifying TPP by qualified persons primarily engaged
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in manufacturing, telecommunications and electrical
generation activities. The bill was held in this
Committee.
ii) AB 1152 (Niello) of the 2007-08 Legislative Session
would have provided a state SUT exemption for purchases
of qualifying TPP by qualified persons engaged in
manufacturing. The bill was held in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
City of Palm Desert
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098