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