BILL ANALYSIS Ó
AB 777
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 777 (Muratsuchi) - As Amended: April 16, 2013
SUSPENSE
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Taxes: exemption: space flight property
SUMMARY : Exempts from property tax qualified property, as
defined, for use in space flight. Specifically, this bill :
1)Provides a property tax exemption for qualified property for
use, or for intended use, in space flight.
2)Defines "qualified property" to mean any of the following:
a) Tangible personal property (TPP) that has space flight
capacity. This includes an orbital space facility, space
propulsion system, space vehicle, launch vehicle,
satellite, or space station of any kind, and any component
thereof;
b) TPP to be placed or used aboard any facility, system,
vehicle, satellite, or station described above; or,
c) Fuel produced, sold, and used exclusively for space
flight and not adaptable for use in ordinary vehicles.
3)Defines "space flight" to mean any flight designed for
suborbital, orbital, or interplanetary travel by a space
vehicle, satellite, space facility, or space station of any
kind.
4)Provides that the exemption shall not be denied if the space
launch fails, is postponed, or is cancelled, or for the
destruction of any launch vehicle, or any component thereof.
5)Provides that the exemption will apply to lien dates on or
after January 1, 2007.
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6)Provides that notwithstanding existing law, the state shall
not reimburse any local agency for lost property tax revenue.
7)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Specifies that all personal property is taxable unless the law
provides for a specific exemption. (California Constitution,
Article XIII, Section 1).
2)Imposes a property tax on TPP items used in a trade,
profession, or business. [Revenue & Taxation Code (R&TC)
Section 224].
3)Provides a property tax exemption for business inventories,
while supplies are taxable. (R&TC Section 219, Property Tax
Rule 133).
FISCAL EFFECT : The Board of Equalization estimates an annual
revenue loss of at least $1.1 million. Additionally, this
bill's retroactive provisions would cancel or refund the $2
million tax liability for propulsion systems.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Space exploration, until very recently, was an entirely
government run industry. However, California has seen the
emergence of private space companies that put our state at
the forefront of innovation and technology. Grabbing
international headlines, companies like Space X are not
only creating the most advanced space vehicles, but are
also significantly contributing to the state's economy and
our local communities. This year Space X has created over
2,700 high-paying jobs and new manufacturing jobs that do
not require a four-year degree; spent $150 million
contracting with over 1,000 California suppliers; and
continues to support and train local students in science,
technology, engineering and mathematics (STEM) disciplines.
Despite the ground-breaking advances made by the aerospace
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industry, California has yet to adapt sensible tax policies
that reflect the realities of this emerging business
sector. AB 777 would exempt propulsion systems from
property taxes, ensuring that California tailors a sensible
taxation policy that accounts for the needs of the
aerospace manufacturing industry. This bill will ensure
that California's brilliant space technology innovators
stay in business by nurturing a rational tax policy for the
state's aerospace sector.
2)Proponents of this bill note the following:
At one time, California was the leader in the aerospace
industry, but the State's position slowly eroded as
multiple aerospace manufacturers moved their operations
elsewhere. Bucking this trend, SpaceX has not only
maintained its headquarters and manufacturing operations in
California, but it has grown exponentially. As a direct
result, California has re-emerged as the U.S. leader in
commercial space launch.
SpaceX has booked nearly 50 launches on its manifest,
representing more than $4 billion in contracts. These are
missions that would have otherwise been won by the French,
Russians, and Chinese, and constituted a substantial
economic loss for California and the U.S. economy. As
SpaceX continues to win orders for launch services, the
company is investing significantly in new technologies that
push the boundaries of space flight.
3)Opponents of this bill note the following:
The property tax is the only significant source of general
purpose revenue for counties. Over the past thirty years,
county general revenues have steadily been replaced or
partially replaced with revenue restricted to one
particular purpose or another.
If favoring ownership of this sort of property is an issue
of statewide concern, as passing this bill would indicate,
then the state should use statewide revenues to reimburse
counties and other local agencies for their losses, as
provided by statute.
4)Committee Staff Comments:
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a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, United
States (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 new tax
expenditure program, in the form of a property tax
exemption for space flight property.
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 takes a
two-thirds vote to rescind an existing tax expenditure
absent a sunset date. For this reason, the author may wish
to include a five-year sunset date for this exemption, to
provide the opportunity for future legislative review.
a) What is taxable? : California Constitution, Article
XIII, Section 1 states that, unless otherwise exempt as
provided by the State Constitution or the laws of the U.S.,
all property is taxable. Taxable property is either real
property or personal property. Therefore, all personal
property is taxable unless it is exempt by legislature with
a two-thirds vote. SpaceX is attempting to obtain an
exemption from personal property tax for qualified property
that has space flight capacity, (i.e., space rockets).
Because space flight property is classified as personal
property, SpaceX must show it falls under an existing
exemption. If the property does not qualify under an
exemption, by default, it is taxed.
b) Existing Exemption : Business inventories are exempt
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from tax under R&TC Section 129. The exemption generally
applies to TPP that is held for sale or lease in the
ordinary course of business. In order to qualify under the
inventory exemption, a space rocket would have to be sold
or leased in the regular course of business. However, it
is unclear if SpaceX actually sells or leases the rockets
it manufactures. It appears that SpaceX, instead, provides
a service, (i.e., delivering items into space). SpaceX
might argue that although it does not sell the rockets, the
service provided amounts to a sale since portions of the
rockets are destroyed on re-entry. From the information
provided to this Committee, it does not appear that the
rockets fall under the inventory exemption because they are
not clearly sold or leased in the normal course of
business. However, the rockets could potentially qualify
under another exemption.
Article XIII, Section 3, subdivision (l) of the California
Constitution provides that vessels of more than 50 tons
burden and engaged in the transportation of freight or
passengers are exempt from property taxation. To qualify
for the exemption, a vessel must be exclusively engaged in
the transportation of freight or passengers or at least
primarily so engaged. While the language is clearly
intended to apply only to vessels, SpaceX may argue that it
should be afforded a similar exemption because it provides
a similar service.
Assuming the rockets are not inventory and fall under no
other personal property tax exemption, the Legislature
maintains the authority to exempt personal property.
Section 2 of Article XIII of the California Constitution
provides that the Legislature, with two-thirds of the
membership of each house, may classify personal property
for differential taxation or for exemption. Providing an
exemption may encourage SpaceX to continue investing and
growing in California. However, providing a narrow
exemption for a single company may also encourage other
similarly situated companies to ask for a personal property
exemption on their business supplies.
REGISTERED SUPPORT / OPPOSITION :
Support
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El Camino College
Los Angeles Area Chamber of Commerce
South Bay Association of Chamber of Commerce
SpaceX
State Board of Equalization Member Jerome E. Horton
Opposition
California State Association of Counties
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098