BILL ANALYSIS �
AB 486
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 486 (Mullin) - As Amended: April 10, 2013
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: manufacturing
research and development
SUMMARY : Establishes a partial sales and use tax (SUT)
exemption, beginning January 1, 2014, for specified
manufacturing equipment. Specifically, this bill :
1)Exempts from SUT, qualified tangible personal property (TPP)
used by either:
a) A "qualified person" for use primarily in manufacturing,
processing, refining, fabricating, or recycling of
property, research and development, as specified; or,
b) A contractor purchasing in the performance of a
construction contract for a "qualified person" who will use
the TPP as an integral part of the manufacturing,
processing, refining, fabricating, or recycling process, or
as a storage facility for use in connection with the
manufacturing process.
2)Defines qualified TPP to include all of the following:
a) Machinery and equipment, including component parts and
contrivance such as belts, shafts, moving parts, and
operating structures;
b) Equipment or devices used or required to operate,
control, regulate, or maintain the machinery and equipment,
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;
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c) Property used in pollution control that exceeds
standards established by this state or any local or
regional government agency within this state;
d) Special purpose buildings and foundations, as specified.
3)Specifies that qualified TPP does not include:
a) Consumables with a useful life of less than one year;
b) Furniture, inventory, and equipment used in the
extraction process, or equipment used to store finished
products;
c) TPP used primarily in administration, general
management, and marketing.
4)Defines a "qualified person" as any of the following:
a) A person primarily engaged in those lines of business
described in Codes 3111 to 3999, inclusive, 5112, 541711,
or 541712 of the North American Industry Classification
System (NAICS) published by the United States Office of
Management and Budget, 2012 edition; or,
b) An affiliate of a person who is a qualified person
described above, as specified.
5)Defines "fabricating" as making, building, creating,
producing, or assembling components or property to work in a
new or different manner.
6)Defines "manufacturing" as the activity of converting or
conditioning TPP by changing the form, composition, quality,
or character of the property for ultimate sale at retail or
use in the manufacturing of a product to be ultimately sold at
retail. Manufacturing includes any improvements to TPP that
result in a greater service life or greater functionality than
that of the original property.
7)Defines "primary" to mean that qualified TPP is used 50% or
more of the time in an activity that qualifies that taxpayer
for the SUT exemption.
8)Defines "process" to mean the period beginning at the point at
which any raw materials are received by the "qualified person"
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and introduced into the manufacturing, process, refining,
fabricating, or recycling activity of the "qualified person"
and ending at the point at which the qualified activity has
altered TPP to its completed form. Raw materials are
considered introduced into the process when the raw materials
are stored on the same premises where the qualified activity
is conducted.
9)Defines "processing" to mean the physical application of the
materials and labor necessary to modify or change the
characteristics of TPP.
10)Defines "refining" to mean the process of converting a
natural resource to an intermediate or finished product.
11)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 SUT Law or the Transactions and Use Tax Law;
b) Under Revenue and Taxation Code (R&TC) Sections 6051.2,
or 6201.2, or pursuant to Section 35 and Section 36 of
Article XIII of the California Constitution, as specified.
12)Takes effect immediately as a tax levy.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling TPP,
absent a specified exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)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 tax and must be remitted to the state
Board of Equalization (BOE).
FISCAL EFFECT : Unknown.
COMMENTS :
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1)The author has provided the following statement in support of
this bill:
Most economists who study government finance and taxation
agree that business inputs such as machinery, research
equipment, and raw materials should be exempt from the
sales and use tax because business outputs are already
taxed. Taxing both inputs and outputs results in double
taxation, which stifles investment and innovation. In
fact, most other states either provide a significant
exemption or don't tax these kinds of purchases. This puts
our state at a distinct disadvantage as we compete not only
with other states, but also with nations around the world.
California should be a leader in attracting research and
development, especially in the biotechnology and high tech
industries. However, according to the California
Manufacturers & Technology Association, California
manufacturing costs are 20 percent higher than the average
of the 49 other states. Additionally, while the
manufacturing economy is expanding in the rest of the
county, it is contracting in California. As we move toward
a more innovation-based economy, our tax policies should
[incentivize] growth and investment. Restoring this tax
exemption is a concrete step in showing business that the
legislature is serious about getting our state back on
solid economic footing.
2)Proponents of this measure state:
Most states recognize that taxing the input as well as the
final manufactured product is double taxation and
discourages investment. The current policy has resulted in
less production in California, with out-of-state companies
electing to grow elsewhere and in-state companies
continuing to shift workers or facilities to other regions
that do not burden capital investments with excess
taxation.
AB 486 addresses this tax inequity and barrier to capital
investment by exempting manufacturing equipment purchases
from state and local sales and use tax, and seeks to exempt
sustainable development and R&D equipment from the state
portion of sales and use tax. Removing investment barriers
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to promote new machinery and equipment purchases in
California will foster productivity, make manufacturers
more competitive, and allow them to keep employees and
strengthen the state's economy.
Our ability to meet our state's economic needs depends on a
healthy and competitive California economy. A new and
improved tax treatment for manufacturing and R&D
investments will send a strong message that California
favors fair tax policies that make the state more
business-friendly, even during difficult economic times.
3)Committee Staff Comments :
a) Is the proposed SUT exemption for business inputs good
tax policy ? Businesses currently pay about one-third of
the state's SUT. A business pays SUT when it is considered
to be the final consumer of TPP. Any SUT paid by a
business will be factored into the prices it charges for
goods, which, in turn, may be subject to taxation. This
results in a consumer paying a tax on a tax, i.e.,
pyramiding, which makes the overall tax system less
transparent. Requiring a business in California to pay SUT
on their manufacturing equipment also increases the cost of
production and places the state at a competitive
disadvantage, especially since other states provide an
exemption for certain manufacturing equipment. Nearly all
economists and tax experts agree that taxing manufacturing
equipment represents poor tax policy.
On March 23, 2009, this Committee held an information
hearing on "Tax Policy in a Time of Economic Crisis," where
presenters unanimously agreed that it would be sound tax
policy to eliminate the SUT on most business purchases.
However, the revenue loss associated with the complete
elimination of the SUT can be anywhere between a few
hundred million to over a billion dollars, depending on the
scope of the exemption. Because of this, Dr. Charles
McClure, a Senior Fellow with the Hoover Institute, stated
during the Committee's March 23rd hearing that the SUT base
should be expanded and the rate should be increased to
compensate for the loss in revenues accompanying a
manufacturing exemption.
b) Will the SUT exemption lead to job growth ? Prior to
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January 1, 2004, California had a similar tax incentive
known as the Manufacturer's Incentive Credit (MIC). The
MIC was created in response to the state's economic
downturn during the late 80s and early 90s. During this
time, the state lost about 300,000 jobs and had a 45%
reduction in aerospace alone. The MIC expired on January
1, 2004 after the Employment Development Department (EDD)
found that jobs on the preceding January 1 did not exceed
the total manufacturing jobs in California on January 1,
1994 by more than 100,000. The EDD stated that from
January 1, 1994 to January 1, 2002, the total net increase
in manufacturing employment was 35,150.
c) BOE Analysis : The BOE has outlined several concerns in
its analysis with the implementation of a partial
exemption.
d) Related Legislation . There have been several bills
introduced that would provide a similar tax exemption for
certain TPP:
i) AB 1326 (Gorell), introduced in the 2012-13
legislative session, would establish a SUT exemption for
TPP purchased for use in unmanned aerial vehicle
manufacturing. AB 1326 will be heard in the Assembly
Committee on Revenue and Taxation on April 22, 2013.
ii) SB 376 (Correa), introduced in the 2012-13
legislative session, would establish a partial SUT
exemption and provide a tax credit for specified business
equipment. SB 376 will be heard in Senate Governance and
Finance on April 24, 2013.
iii) AB 303 (Knight), introduced in the 2011-12
legislative session, would have established a partial SUT
exemption for specified business equipment. AB 303 was
held in the Assembly Appropriations Committee.
iv) AB 979 (Silva), introduced in the 2011-12
legislative session, would have established a partial SUT
exemption, beginning January 1, 2012, for specified
business equipment. AB 979 was held in this Committee.
v) AB 1057 (Olsen), introduced in the 2011-12
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legislative session, would have established a partial SUT
exemption for specified equipment. AB 1057 was held in
this committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Acclamation Insurance Management Services
Anheuser-Busch
Baxter Healthcare Corporation
BayBio
Bayer HealthCare, LLC
BIOCOM
Bishop-Wisecarver Corporation
California Business Properties Association
California Cement Manufacturers Environmental Coalition
California Chamber of Commerce
California Chapter of American Fence Association
California Concrete Contractors Association
California Fence Contractors' Association
California Healthcare Institute
California League of Food Processors
California Manufacturers & Technology Association
California Taxpayers Association
Camarillo Chamber of Commerce
Caterpillar
Chemical Industry Council of California
Consumer Specialty Products Association
The Dow Chemical Company
Engineering Contractors' Association
Flasher Barricade Association
General Mills
Intel Corporation
Inline Translation Services, Inc.
International Paper Company
Kimberly-Clark Corporation
Los Angeles County Economic Development Corporation
Marin Builders Association
National Aerosol Association
National Federation of Independent Business - California
Northrop Grumman Corporation
Novartis Pharmaceuticals Corporation
Owens-Illinois, Inc.
Paulson Manufacturing Corporation
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PPG Aerospace
Praxair, Inc.
Procter & Gamble Company
Searles Valley Minerals
Senator George Runner
Silicon Valley Leadership Group
Solar Turbines Incorporated
Southwest California Legislative Council
SPI, The Plastics Industry Trade Association
TechAmerica
Western Plastics Association
Opposition
California Tax Reform Association
California State Association of Counties
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098