BILL ANALYSIS
AB 922
Page 1
Date of Hearing: May 11, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 922 (Miller) - As Introduced: February 26, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Diesel Fuel Tax Law: exemption: biomass-based diesel
fuel
SUMMARY : Exempts temporarily biomass-based diesel fuel produced
in this state with "California feedstock" from the tax imposed
under the Diesel Fuel Tax (DFT) Law. Specifically, this bill :
1)Provides the exemption from July 1, 2009 to June 30, 2014.
2)Defines "California feedstock" as any of the following:
a) Used cooking oil collected in California;
b) Trap grease and other "FOGs" (fats, oils, and greases)
collected in California;
c) Yellow grease produced at a California rendering plant;
d) Animal fat produced at a California rendering plant,
meat packing plant, or processing plant;
e) Brown grease produced at a California rendering plant;
f) Plant or fungal crop grown in California; or,
g) Algae or other microorganisms cultivated in California.
3)Specifies that the State Energy Resources Conservation and
Development Commission (CEC) shall, in cooperation with the
Board of Equalization (BOE), oversee this tax incentive
program. In addition, CEC shall provide the Legislature with
an annual report on the program, containing all of the
following information:
a) The effect of the program on the consumption of
biodiesel by consumers;
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b) The "economic benefits or losses to the state as the
result of the program"; and,
c) A calculation of greenhouse gas emission reductions.
4)Sunsets on December 1, 2014.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Defines "diesel fuel" as any liquid that is commonly or
commercially known or sold as a fuel that is suitable for use
in a diesel-powered highway vehicle. A liquid meets this
requirement if, without further processing or blending, the
liquid has practical and commercial fitness for use in the
engine of a diesel-powered highway vehicle.
2)Defines "blended diesel fuel" as any mixture of diesel fuel
with respect to which tax has been imposed and any other
liquid (such as kerosene) on which tax has not been imposed.
Blended diesel fuel also means any conversion of a liquid into
diesel fuel. "Conversion of a liquid into diesel fuel" occurs
when any liquid that is not included in the definition of
diesel fuel and that is outside the bulk transfer/terminal
system is sold as diesel fuel, delivered as diesel fuel, or
represented to be diesel fuel.
3)Imposes a tax, under the DFT Law, of $0.18 per gallon on
diesel fuel. Biodiesel fuel is taxed in the same manner as
traditional diesel. Specifically, the state imposes the tax
at the first point at which the biodiesel fuel is either:
a) Imported into California for sale, use, or storage;
b) Removed from a California refinery;
c) Removed from a terminal rack in California; or,
d) Blended with tax-paid diesel fuel.
FISCAL EFFECT : CEC estimates that, on average, California will
produce roughly 300 million gallons of biodiesel per year
through 2013. If all of this fuel were exempt, this would
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result in revenue losses of $54 million per year. Because this
bill does not clearly define biomass-based diesel fuel, BOE is
currently unable to identify the percentage of biodiesel
produced in California that would qualify for the exemption.
COMMENTS :
1)The author states, "The projected increase in imports of crude
oil and product by 2020 will place an undue burden upon
California's current infrastructure, possibly resulting in
supply-chain breakdowns, inadequate volumes and increased
price volatility, if the production of alternative and
renewable fuels, like bio-diesel, does not increase along with
the demand. This bill would make bio-diesel fuel produced in
California from California feedstock tax exempt, and help
stimulate the economy by encouraging the conversion of
California feedstock into bio-diesel, by adding incentive for
and encouraging companies looking to establish bio-diesel
production facilities in the State of California to do so."
2)Proponents state, "California's commitment to reduce carbon
emissions, improve air quality and increase its energy
independence is largely dependent on the development and
expanded use of renewable fuels such as biodiesel.
Regrettably, this promising fuel faces substantial impediments
before its use can become widespread in the state. Though
taxed at the same rate as pure diesel, biodiesel is at a
competitive disadvantage given the substantial costs of
infrastructure construction and research and development. In
light of the importance of meeting the environmental goals
established by AB 32, the Global Warming Solutions Act of
2006, it is imperative that state policy promote the
production of renewable fuels that currently face a
competitive disadvantage."
3)Opponents state, "We do not believe that there is any evidence
that a fuel tax exemption would have any impact on the use of
biodiesel fuel. To the extent that you can demonstrate
benefits, we urge that funding for this exemption be paid for
out of the proposed carbon fund (AB 231, SB 31) not the
state's General Fund or Prop. 42 funding."
4)BOE notes the following in its staff analysis of this bill:
a) What kind of biomass-based diesel would be exempt from
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the excise tax? : "The proposed exemption would only apply
to biomass-based diesel fuel that is produced in California
from 'California feedstock,' as defined. However, it does
not assign responsibility for determining the feedstock
origination. This bill proposes to amend the Revenue and
Taxation Code to define biomass-based diesel fuel but makes
no changes to the Business and Professions Code (which
governs transportation fuels). The Board does not have the
resources, expertise, or staff, much less the
administrative responsibility, to enforce the quality,
advertisement, and labeling of biomass-based diesel fuels.
In addition, although 'California feedstock' has been
defined, biomass-based diesel fuel has not, and it appears
to be very similar in many respects to biodiesel. Without
a clearly defined distinction between biomass-based diesel
fuel and biodiesel, the exemption may be broader than the
author intended."
b) A similar issue would arise in determining biomass-based
diesel fuel produced in California from California
feedstock : "Currently, the Board does not separately
categorize biomass-based diesel fuel produced in this state
from California feedstock. Although the Board may be able
to identify large producers of biomass-based diesel fuel in
California, we would need to develop product listings of
biomass-based diesel fuel so that those qualifying fuels
considered to be from 'California feedstock' would be
exempt from the state's excise tax. The Board would be
challenged in identifying individuals that produce the
qualified biomass-based diesel fuels, and since
biomass-based diesel fuel produced from California
feedstock would lose its identity if blended with other
non-qualifying diesel fuels the Board would be challenged
in tracking the mixed diesel fuel through the distribution
chain for audit purposes. Therefore, we may only be able
to provide limited sales and revenue information to the
[CEC] for preparation of their annual report to the
Legislature."
c) Reporting requirements would be complicated : "Only that
portion of the biomass-based diesel fuel that is produced
in this state from California feedstock would be subject to
the exemption from the diesel fuel tax. As such, the
terminal operator, supplier, retailer, and consumer may see
differing tax rates and prices depending on the
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biomass-based diesel fuel blend or source of the
biomass-based diesel fuel. Invoicing and receipt
requirements may also need to be changed to show that the
exempt portion of the blended diesel was not taxed.
Currently, California does not offer tax breaks or incentives
for diesel fuel blended with biomass-based diesel fuel.
The diesel fuel blend, regardless of concentration, is
considered diesel fuel when sold for use in a
diesel-powered highway vehicle.
Reporting requirements could be more complicated for all
parties involved since blending of biomass-based diesel
fuel can occur at different points in the distribution
process. Blending of the diesel and biomass-based diesel
fuels could occur at the user's fuel tank, at the
supplier's tanker trucks, or at the terminal operator's
pipeline or rack."
d) This bill could make reporting for interstate users more
difficult . "Interstate users would be burdened with
additional record keeping and segregating for purposes of
reporting the correct amount of tax on purchases of
biomass-based diesel fuel produced in California from
California feedstock. While California may exempt the
product without invoices or receipts showing the reduced
taxes, it would be difficult for the interstate user to
document a credit. In addition, other jurisdictions in
which the interstate user travels and reports and pays tax
may not allow such credits even with an invoice.
Accordingly, this bill could complicate reporting for
interstate users and could lead to additional reporting
errors. Further, if California is not the interstate
user's base state for fuel tax reporting, the interstate
user may have to report and pay to its reporting state the
full tax on gallons of diesel fuel purchased in California
and then obtain a refund from the Board for the exempt
gallons purchased, increasing the Board's administrative
workload."
e) Is this bill constitutional ? "The U.S. Supreme Court
has consistently held that when a state grants undue
preferential treatment, such as a tax or regulatory
preference, to its own state's products or services, such
preferential treatment violates the Commerce Clause of the
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U.S. Constitution. The author may wish to have the
Legislative Counsel's office review this issue."
5)Committee Staff Notes :
a) California feedstock : It is unclear to Committee staff
who would be responsible for determining the origins of
feedstock used in the fuel production process. BOE has
noted that it does not have the resources, expertise, or
staff to monitor the quality, advertisement, or labeling of
biodiesel fuels.
b) CEC report : This bill would require the CEC to issue an
annual report to the Legislature on this tax expenditure
program. Included in this report would be the following:
i) The effect of the tax incentive program on the
consumption of biodiesel by consumers;
ii) Economic benefits or losses to the state as a result
of the program; and,
iii) A calculation of greenhouse gas emission reductions.
It is unclear to Committee staff how the CEC, or any other
entity, would calculate greenhouse emission reductions
related to this proposed exemption.
c) Implementation date : As with AB 2240 (Tran), introduced
in the 2007-08 Legislative Session, and held in this
committee, AB 922 would provide an exemption beginning July
1, 2009. It is doubtful this bill could be signed by the
Governor before this date. As such, this bill would
provide for a retroactive exemption, further complicating
administration of this measure. The author may wish to
amend this bill to provide that the exemption period will
begin on July 1, 2010 instead.
d) Related Legislation :
i) AB 2240 (Tran), introduced in the 2007-08
Legislative Session, contained provisions identical to
this bill. AB 2240 was held in this Committee.
ii) AB 1547 (Committee on Revenue and Taxation), of the
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current Legislative Session, includes a BOE-sponsored
provision clarifying that the definition of "diesel fuel"
includes petroleum-based diesel fuel, biodiesel, and
other biomass-based diesel fuel. AB 1547 is currently in
Assembly Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
California Biodiesel Alliance
Extreme Biodiesel
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098