BILL ANALYSIS Ó
AB 1376
Page 1
Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1376 (Nestande) - As Amended: May 2, 2011
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: production of
electrical energy
SUMMARY : Establishes a partial sales and use tax (SUT)
exemption for qualified tangible personal property (TPP) used to
produce electrical energy from renewable sources. Specifically,
this bill :
1)Establishes a partial SUT exemption for qualified TPP that:
a) A "qualified person" uses primarily to produce
electrical energy from renewable sources; or,
b) A contractor uses in the performance of a construction
contract for a "qualified person" who will use the property
as an integral part of the "production of electrical energy
from renewable sources."
2)Defines a "qualified person" as either:
a) A person engaged in those lines of business described in
Code 237130 (Alternative Energy) of the North American
Industry Classification System (NAICS) published by the
United States (U.S.) Office of Management and Budget (OMB),
2007 Edition; or,
b) An affiliate of a person described above, provided the
affiliate is included as a member of that person's unitary
group for which a combined report is required.
3)Defines qualified TPP to include:
a) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and
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operating structures; and,
b) All equipment or devices used or required to operate,
control, regulate, or maintain the machinery including,
without limitation, computers, data processing equipment,
and computer software, together with all repair and
replacement parts with a useful life of one or more years.
4)Specifies that qualified TPP does not include:
a) Consumables with a normal useful life of less than one
year;
b) Furniture, inventory, and equipment not used as an
integral part of the generation of electrical energy from
renewable sources; or,
c) TPP used primarily in administration, general
management, or marketing.
5)Defines the "production of electrical energy from renewable
sources" as the activity of producing electricity from a
facility that has been certified by the State Energy
Conservation and Development Commission as being renewable
portfolio standard eligible.
6)Provides that the exemption shall not apply with respect to
any tax levied:
a) By a county, city, or district under the Bradley-Burns
Uniform Local SUT Law or the Transactions and Use Tax Law;
and,
b) Under Revenue and Taxation Code (R&TC) Sections 6051.2,
6051.5, 6201.2, and 6201.5, or pursuant to Section 35 of
Article XIII of the California Constitution.
7)Applies to leases of qualified TPP classified as "continuing
sales" and "continuing purchases" in accordance with R&TC
Sections 6006.1 and 6010.1. The SUT exemption:
a) Shall apply to rentals under such a lease provided the
lessee is a qualified person and the property is used in a
qualified manner; and,
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b) Will only be available for six years from the date of
commencement of the lease. At the close of the six-year
period, lease receipts are subject to SUT without
exemption.
8)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,
components, or systems.
FISCAL EFFECT : The BOE estimates annual General Fund revenue
losses of $329 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
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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)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, U.S.
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 production of energy
from renewable sources.
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) 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
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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.
d) This bill's definition of a "qualified person" seems
overly broad : This bill defines a "qualified person" as
someone engaged in those lines of business described in
NAICS Code 237130. Code 237130, in turn, describes
entities primarily engaged in the construction of power
lines and towers, power plants, and radio, television, and
telecommunications towers. Specifically, the code covers a
broad range of activities, including cable laying,
telephone line stringing, and nuclear power plant
construction. As such, BOE staff has expressed concern
that the bill's definition of a "qualified person" is
overly broad and mismatched to the author's stated intent.
e) Suggested amendments :
i) In defining a "qualified person," it is recommended
that this bill require that the qualifying entity be
primarily engaged in those lines of business described in
the referenced NAICS Code. This is an important issue
and one that generated many disputes when the BOE
administered the prior SUT exemption for manufacturing
equipment.
ii) As a tax levy, the provisions of this bill would
become effective immediately. However, since retailers
generally rely on receiving an "official notice" of tax
law changes from the BOE before implementing a law
change, it is recommended that a delayed operative date
be incorporated into this bill in order for the BOE to
give proper advance notice.
iii) This bill provides that qualified TPP does not
include consumables with a "normal useful life" of less
than one year. This bill, however, does not provide any
guidance on how "normal useful life" is to be measured.
Committee staff suggests amendments specifying a clear
and objective standard for determining the useful life of
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an item.
iv) On page 4, line 4, delete "except as provided in
clause (v) of subparagraph (A)" as a technical amendment.
f) 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.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
AB 1376
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319-2098