BILL ANALYSIS Ó
AB 1376
Page 1
Date of Hearing: April 11, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1376 (Nestande) - As Amended: April 4, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: renewable energy
facilities
SUMMARY : Establishes a partial sales and use tax (SUT)
exemption for tangible personal property (TPP) purchased to
construct a facility that "will use solar, biomass, wind, and
geothermal energy to generate electricity of one megawatt or
greater." Specifically, this bill :
1)Provides that, notwithstanding existing law, this exemption
shall not apply to any tax levied by a county, city, or
district pursuant to either the Bradley-Burns Uniform Local
SUT Law or the Transactions and Use Tax Law.
2)Takes immediate effect as a tax levy.
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
retailer's gross receipts from TPP sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
State Board of Equalization (BOE).
3)Authorizes the California Alternative Energy and Advanced
Transportation Financing Authority to approve a state and
local sales tax exclusion for TPP used for the design,
manufacture, production, or assembly of advanced
transportation technologies or alternative source products,
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components, or systems.
FISCAL EFFECT : The BOE estimates annual revenue losses of at
least $411 million.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
California has historically been a leader in renewable
energy development and Investor Owned Utilities (IOU)
currently procure an average of 18% of their energy needs
through qualifying renewable energy sources (some municipal
owned utilities have a higher percentage). Former Governor
Arnold Schwarzenegger signed an executive order in 2009
increasing the requirement to procure renewable energy
resources to 33% by 2020, and proposed legislation would
statutorily make this change. In order to facilitate the
development of renewable facilities, it is important to
extend the sales tax exemption for construction of these
facilities.
2)Sunpeak Solar LLC (Sunpeak) is sponsoring this bill. Sunpeak
states, "If sponsors are to build in California under existing
sales tax law and policy, then they will have less financing
available to them because of higher total project cost with
the inclusion of sales tax. This means they must inject more
equity into projects, all other Ýthings] being equal. The
result of the capital constraints is that projects become
smaller than otherwise would be the case."
3)Opponents state, "The state is in a multibillion-dollar budget
deficit and cannot afford to provide a sales tax exemption for
renewable energy equipment at this time. Our primary concern
with this bill is substantial revenue loss. As a matter of
tax policy, we understand the argument in part, and would
suggest that this policy substitute for single sales factor
and other corporation tax breaks (e.g. loss carry-backs) in a
revenue-neutral matter."
4)BOE notes the following in its staff analysis of this bill:
a) "The bill uses the undefined terms "construction of a
facility" and "solar", "biomass", "wind", and "geothermal".
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The absences of a definition to clarify these terms could
lead to disputes with taxpayers and would complicate the
administration of this exemption."
b) "As currently drafted, the bill could include any
tangible personal property that is used to construct a
facility that will use solar, biomass, wind or geothermal
energy to generate electricity of one megawatt or greater.
If the intent of AB 1376 is to encourage the development of
new renewable energy facilities, then the author may wish
to limit the definition of tangible personal property only
to those types of property that are directly related to the
construction of a new renewable energy facility. For
example, equipment directly used in the construction of a
new renewable energy facility could include solar panels,
photovoltaic cells, wind turbines, boilers, compressors,
distribution control systems, pumpers, and generators."
c) "Is it the author's intent to exclude tangible personal
property not directly related to the construction or
operation of a renewable energy facility? For example,
would the proposed exemption apply to purchases of property
used in administration, general management, or marketing?
Would trucks used to transport materials and equipment to
the facility be considered qualifying items? Would fuels
used or consumed in certain activities be qualifying items?
Would the exemption apply to buildings designed for
purposes other than producing or generating electricity,
such as storage facilities?"
d) "The bill should specify a percentage or level of use
required for a purchase to qualify for the partial
exemption. For example, the partial exemption would apply
when the item purchased will be used primarily or
exclusively in the construction of a renewable energy
facility, which the bill would also define. The BOE
administers several sales and use tax exemptions, which
define "primarily" to mean 50 percent or more of the time.
Clarifying the percentage of use necessary for a purchase
to qualify for the partial exemption will assist BOE staff
in administering this exemption."
e) "The term "person" should be clarified. Would the
proposed exemption apply to materials and fixtures
purchased by a contractor in the performance of a
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construction contract for persons building new renewable
energy facilities? The bill needs to clarify how this
would work."
5)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960's, United
States Treasury officials began arguing that these features
of the tax law should be referred to as "expenditures,"
since they are generally enacted to accomplish some
governmental purpose and there is a determinable cost
associated with each (in the form of foregone revenues).
This bill would enact a tax expenditure, in the form of a
partial SUT exemption, designed to encourage the
construction of renewable energy facilities.
b) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
it should also be noted that, once enacted, it generally
takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
c) Amendments should clarify the scope of the proposed
exemption . Over the past several years, this Committee has
reviewed a number of bills seeking to exempt various
business purchases from sales tax. Many of these bills are
modeled on a prior tax expenditure program known as the
Manufacturers' Incentive Credit (MIC), which sunset on
January 1, 2004. As such, these bills generally contain
provisions clearly identifying the TPP qualifying for the
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exemption, as well as rules for dealing with a host of
issues like the treatment of exempt TPP later used for
non-exempt purposes. This bill, however, provides no such
guidance and instead offers a rather open-ended and
ambiguous exemption. This, in turn, could lead to taxpayer
disputes with BOE. To effectively administer this tax
expenditure program, BOE needs clarification on the scope
of the proposed exemption. Committee staff is available to
work with the author to this end.
d) Should this bill be amended to provide a sunset date? :
As currently drafted, this bill lacks a sunset date. As
such, the SUT exemption would remain a permanent part of
the tax code absent a supermajority vote to repeal or
modify it. Many within the business community argue that
sunset dates reduce the level of certainty needed for
long-term planning purposes. Others, however, argue that
sunset dates provide the Legislature a much-needed
opportunity to review the efficacy of individual tax
expenditure programs. Committee staff suggests that this
bill be amended to provide an appropriate sunset date.
e) Related legislation : Committee staff notes the
following related bills introduced in the 2009-10
Legislative Session:
i) AB 1719 (Harkey) would have established a partial
SUT exemption for specified business equipment used in
either manufacturing or research and development. AB
1719 was held in this Committee.
ii) AB 1812 (Silva) would have established a partial SUT
exemption, operative January 1, 2011, for specified TPP
used in manufacturing. AB 1812 was held in this
Committee.
iii) AB 2280 (Miller) would have established a complete
SUT exemption for equipment a manufacturer purchases for
use in its manufacturing business in this state. AB 2280
was held in this Committee.
iv) AB 2525 (Blumenfield) would have established a SUT
exemption for TPP used in the manufacturing process of
clean energy technology, as specified. AB 2525's hearing
was cancelled at the request of the author.
AB 1376
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REGISTERED SUPPORT / OPPOSITION :
Support
Sunpeak Solar LLC (sponsor)
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098