BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1485
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          SENATE THIRD READING
          SB 1485 (Kehoe)
          As Amended  August 24, 2012
          Majority vote.  Tax levy

           SENATE VOTE  :39-0  
           
           REVENUE & TAXATION  8-0         APPROPRIATIONS      17-0        
           
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          |Ayes:|Perea, Harkey, Beall,     |Ayes:|Gatto, Harkey,            |
          |     |Cedillo, Fletcher,        |     |Blumenfield, Bradford,    |
          |     |Fuentes, Gordon, Nestande |     |Charles Calderon, Campos, |
          |     |                          |     |Davis, Donnelly, Fuentes, |
          |     |                          |     |Hall, Hill, Cedillo,      |
          |     |                          |     |Mitchell, Nielsen, Norby, |
          |     |                          |     |Solorio, Wagner           |
           ----------------------------------------------------------------- 
           
          SUMMARY  :  Authorizes a person who uses tax-paid motor vehicle 
          fuel (MVF) as a blending component of a fuel taxed under the Use 
          Fuel Tax (UFT) Law (e.g., E-85) to receive a refund of the 
          excise tax paid on that MVF.  Specifically,  this bill  :

          1)Allows a refund of MVF tax to any person who buys tax-paid MVF 
            to produce a blended fuel that will be used to operate motor 
            vehicles on the state's highways, when that blended fuel is 
            taxed under the UFT Law.

          2)Provides that, to be eligible for a refund, a person must show 
            that the applicable California fuel tax has been paid and must 
            submit or have submitted the refund application request on or 
            after January 1, 2011. 

          3)Contains legislative findings noting that this bill serves 
            various public purposes.  

          4)Takes immediate effect as a tax levy.  

           EXISTING LAW  :

          1)Imposes, pursuant to the MVF Tax Law and the Diesel Fuel Tax 
            (DFT) Law, state excise taxes at specified rates per gallon on 
            the removal, entry, sale, delivery, or specified use of MVF 
            and diesel fuel respectively. 








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          2)Imposes, pursuant to the UFT Law, a state excise tax on the 
            use of other fuel at specified rates.  

          3)Allows certain persons who have paid a tax for MVF, as 
            specified, to be reimbursed and repaid the amount of the tax.  


           FISCAL EFFECT  :  The Assembly Appropriations Committee estimates 
          costs of roughly $288,000 in fiscal year (FY) 2012-13 to pay 
          past refunds, and ongoing costs of $199,000 annually, beginning 
          in FY 2012-13.



           COMMENTS  : 

           Background information provided by the author  :  According to the 
          author, California relies on petroleum-based fuels to meet 
          almost 96% of its on-road fuel demands.  California's oil 
          fields, however, produce only 38% of the total oil needed to 
          fuel our transportation system.  The remaining 62% of our 
          state's oil comes from foreign nations and from Alaskan imports. 
           

          To diversify our state's transportation energy sources, both 
          state and national policymakers allow the use of E-85, a fuel 
          that is comprised of 85% ethanol (derived from corn) and 15% 
          gasoline.  This fuel can be used in so-called "flex-fueled 
          vehicles" designed to run on both conventional gasoline and 
          E-85.  

          The author notes that E-85 makes its way to retail gas stations 
          in two ways.  In some regions, it can be purchased at the "rack" 
          pre-blended.  In other locations, it is "splash blended" through 
          a process whereby ethanol and gasoline are purchased separately 
          and then blended together to create E-85 fuel.  

          While E-85 can be procured either directly at the rack 
          pre-blended, or by mixing two fuels together, the two 
          procurement methods result in differential taxation by the 
          state.  Specifically, the author notes:

                Right now when someone brings their tanker trucks to 
                load-up on E-85 in order to sell it at their fueling 








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                station, they are charged the use fuel tax (UFT) when 
                the fuel is finally sold at the gas station (retail 
                level) at $.09 per gallon.  

                However, those who "splash blend" their E-85, are 
                required to pay the motor vehicle fuel (MVF) tax on 
                the gasoline ($.353 per gallon) up front, at the 
                "rack", at the time of purchase and then must pay the 
                UFT when the E-85 is later sold at the gas station. 

                Essentially, these groups of E-85 "splash blenders" 
                are being taxed twice, while their competitors who 
                Ýprovide] pre-blended E-85 are not.

                The California Board of Equalization understood that 
                "splash-blenders" were being taxed twice on their E-85 
                fuel and created a re-fund process so that the MVT 
                could be returned via the State Controller.  But in 
                March of 2011, the Controller issued an opinion 
                stating that the Revenue and Taxation Code did not 
                give him express authority to provide a tax refund to 
                E-85 "splash blenders".  

          The author contends that this bill "evens the playing field" by 
          clarifying that E-85 "splash-blenders" are entitled to a MVF tax 
          refund from the State Controller.  In this manner, everyone will 
          pay the same tax (UFT), regardless of whether the E-85 is 
          pre-blended or "splash-blended."  

          Assembly Revenue and Taxation Committee staff comments:

           1)The UFT Law  :  Under the UFT Law, the state imposes an excise 
            tax of $0.18 per gallon for the use of fuel, with certain 
            exceptions.  ÝRevenue and Taxation Code (R&TC) Section 
            8651(a)(5).]  R&TC Section 8604 defines "fuel" to include any 
            combustible gas or liquid used in an internal combustion 
            engine to propel motor vehicles on the highways, except fuel 
            that is subject to tax under the MVF Tax Law or the DFT Law.  

          R&TC Section 8651.8(a), however, provides that the excise tax 
            imposed on ethanol or methanol containing no more than 15% 
            gasoline or diesel fuels shall be one-half the rate set for 
            most fuels under the UFT Law (i.e., $0.09 per gallon).  E-85 
            fuel, an ethanol and gasoline blend, is the predominant 
            blended fuel under the UFT Law.    








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            While the UFT is imposed on the use of the fuel, pursuant to 
            R&TC Section 8732, the fuel's vendor is required to collect 
            the tax from the user and give the user a receipt.  Thus, 
            vendors are required to collect and remit to the BOE the $0.09 
            per gallon UFT on the full volume of E-85 sold or dispensed 
            from a retail pump.     
             
          2)The MVF Tax Law  :  Under the MVF Tax Law, the state imposes an 
            excise tax of $0.357 per gallon ($0.18 excise tax and $0.177 
            surtax) on the removal of gasoline at the refinery or terminal 
            rack, upon entry into the state, and upon sale to an 
            unlicensed person.  R&TC Section 8101, in turn, requires the 
            refund of the excise tax paid on gasoline to certain persons 
            under specified circumstances.

            The Board of Equalization (BOE) notes:

                With respect to Ýthe] California excise tax on 
                gasoline, the ÝBOE] is responsible for registration, 
                licensing, return processing, auditing functions, and 
                appeals, while the State Controller's office (SCO) is 
                responsible for the collection of delinquent gas taxes 
                and the refund of excise taxes on gasoline not used on 
                Ýthe] highway.      
                 
           3)So, what's the problem?  :  As noted above, E-85 is a product of 
            blending two components - ethanol fuel and gasoline.  Where 
            the blending occurs, however, impacts the fuel's taxation.  If 
            the E-85 is obtained pre-blended at the "rack," then the 
            product is considered a use fuel and the vendor is responsible 
            for reporting and paying the tax.  However, if the E-85 is 
            blended below the rack (i.e., the two component fuels are 
            purchased separately and blended elsewhere in the distribution 
            chain), the gasoline tax has already been paid and passed on 
            by the supplier at the "rack" and, when the gasoline is 
            blended with ethanol, the resulting E-85 fuel is then subject 
            to the UFT on the full volume.

            In October 2011, the BOE issued a special notice for producers 
            of E-85 fuel, which explained that below-the-rack blenders are 
            not entitled to a refund of the MVF tax paid on the gasoline 
            component of the E-85. 

           4)What would this bill do?  :  This bill would authorize a person 








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            who uses tax-paid MVF (i.e., gasoline) as a blending component 
            of a fuel taxed under the UFT Law (e.g., E-85) to receive a 
            refund of the excise tax paid on that gasoline.


           Analysis Prepared by  :    M. David Ruff / REV. & TAX. / (916) 
          319-2098 


                                                                FN: 0005448