BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1243 (Lowenthal) - Sales and use tax exemption: bunker fuel.
Amended: May 15, 2012 Policy Vote: G&F 9-0
Urgency: No Mandate: No
Hearing Date: May 21, 2012 Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 1243 would extend the sunset date on a partial
sales and use tax exemption for the purchase of maritime fuels
until January 1, 2026.
Fiscal Impact: The Board of Equalization (BOE) estimates sales
and use tax revenue losses of $91.7 million to $137.5 million
annually, beginning in 2014, as follows:
$41.3 million to $61.9 million in General Fund losses
$2.6 million to $3.9 million in losses to the Fiscal
Recovery Fund (ERB repayment)
$11.1 million to $16.7 million in losses to the Local
Revenue Fund of 2011 (dedicated to local realignment
purposes)
$21 million to $31.4 million in local revenue losses
$15.7 million to $23.6 million in district revenue losses
Background: Existing law provides a partial exemption from the
sales and use tax on maritime fuels purchased in California by a
water common carrier. It is referred to as a partial exemption
because the carrier only pays taxes on the portion of fuel used
from the California port to the first out-of-state destination;
the remainder is exempt. The current partial exemption, which
was enacted by SB 808 (Karnette) Chap 712/2003, will sunset on
January 1, 2014. Staff notes that the state fully taxed
maritime fuels from July 15, 1991 through December 31, 1992, and
from January 1, 2003 through March 31, 2004.
Generally, items purchased in California that are subject to the
sales and use tax are presumed to be used in the state, while
sales for export are usually exempt. Maritime fuels fall
somewhere in between, since the fuel purchased by a water
carrier is used both within and outside state boundaries, which
supports the tax policy reasons for a partial exemption. In
SB 1243 (Lowenthal)
Page 1
addition, the maritime fuels market is global and competitive,
and the combination of multiple bunkering ports and long
cruising ranges give shipping companies considerable flexibility
in fueling.
Proposed Law: SB 1243 would extend the current partial sales and
use tax on maritime fuels sold to water common carriers until
January 1, 2026. The exemption only applies to fuels sold for
use after the first out-of-state destination in the conduct of
business as a common carrier at which cargo or passengers are
loaded or discharged, cargo containers are either added or
removed, fuel is transferred, or docking fees are charged.
Staff Comments: The Legislative Analyst's Office (LAO) has
issued two reports on the effect of the maritime, or "bunker"
fuel exemptions enacted in 1997 and 2003. Both the 2001 and
2007 reports recommended that the Legislature remove the sunset
date on this sales and use tax exemption and make it permanent,
primarily because of the sound tax policy of applying a partial
exemption on fuels used both within and outside the state, and
because it would place California on par with other out-of-state
ports in the nation. The 2007 report also noted the following:
"Based on our review of the performance of the bunker fuel
market both with and without the partial exemption in place, we
conclude that the partial SUT exemption for bunker fuel
increases California bunker fuel sales and related economic
activities. At the same time, however, it reduces state and
local revenues by tens of millions of dollars annually."
The BOE notes that, based on data from the 2010-11 fiscal year,
total annual sales of maritime fuels in California are estimated
to be $2.98 billion (33.4 million barrels at $89.11 per barrel).
It is estimated that 12% of maritime fuels are consumed from
California ports to the first out-of-state destination, and this
amount is currently subject to taxation under the partial
exemption available until January 1, 2014. Approximately $2.62
billion in sales were exempt from taxation in 2010-11, resulting
in a revenue loss of about $229 million. Based on historical
bunker fuel sales data, BOE estimates that maritime fuels sales
would decline 40% to 60% if the exemption were to expire, and
would likely continue to decline over time if it were not
re-enacted. Therefore the total revenue loss associated with
continuing the exemption would be in the range of $91.7 million
and $137.5 million annually initially, and would likely decline
SB 1243 (Lowenthal)
Page 2
over time since water carriers would most likely purchase
maritime fuels outside of California in the absence of the
exemption.
Recommended Amendments: Staff notes that this bill was amended
in the Governance and Finance Committee to extend the sunset to
2026, but the intention was to only provide a ten-year sunset
extension. Staff recommends that the bill be amended to change
the sunset date to January 1, 2024.