BILL ANALYSIS Ó AB 777 Page 1 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. AB 777 Page 2 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 AB 777 Page 3 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: AB 777 Page 4 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 AB 777 Page 5 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 AB 777 Page 6 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