BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 777|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: AB 777
Author: Muratsuchi (D), et al.
Amended: 2/19/14 in Senate
Vote: 27
SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 2/26/14
AYES: Wolk, Knight, Beall, DeSaulnier, Hernandez, Liu, Vidak
SENATE APPROPRIATIONS COMMITTEE : 7-0, 4/7/14
AYES: De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg
ASSEMBLY FLOOR : 69-5, 01/29/14 - See last page for vote
SUBJECT : Taxes: exemption: space flight property
SOURCE : SpaceX
DIGEST : This bill exempts from the property tax tangible
personal property (TPP) that has space flight capacity.
Property exempted by this bill includes raw materials, works in
progress, finished goods, and includes orbital space facilities,
space propulsion systems, space vehicles, launch vehicles,
satellites, or space stations of any kind. Fuel sold and used
exclusively in space flight is also exempt if it is not
adaptable for use in ordinary motor vehicles. The property need
not be returned to Earth to qualify for the exemption. The
exemption applies to lien dates between January 1, 2014, and
January 1, 2024, and sunsets on July 1, 2025.
ANALYSIS :
CONTINUED
AB 777
Page
2
Existing law:
1. Specifies that all personal property is taxable unless the
law provides for a specific exemption.
2. Imposes a property tax on TPP items used in a trade,
profession, or business.
3. Provides a property tax exemption for business inventories,
while supplies are taxable.
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. 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. 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. Requires that a taxpayer provide, upon request of the
assessor, evidence that the qualified property is being used
as specified.
6. Limits the property tax exemption to taxpayers that have a
primary business purpose in space flight activities.
7. Provides that the exemption shall be operative from the
CONTINUED
AB 777
Page
3
January 1, 2014, lien date to, and include, the January 1,
2024, lien date.
8. Provides that notwithstanding existing law, the state shall
not reimburse any local agency for lost property tax revenue.
9. Repeals this section on July 1, 2025.
10.States that no inference be drawn from the bill's changes to
the law to ensure that the bill does not affect Space
Exploration Technologies Corporation (SpaceX's) current
appeals.
Background
Personal Property Taxes . Section 1 of Article XIII of the
California Constitution provides that all property is taxable
unless explicitly exempted by the Constitution or federal law.
While the Constitution limits the maximum amount of any ad
valorem tax on real property at 1% of full cash value, and
precludes reassessment unless the property is newly constructed
or changes ownership, assessors value personal property each
year. The Constitution specifically allows the Legislature to
exempt personal property from the property tax by 2/3 vote.
The Legislature has previously enacted such exemptions for
particular things, such as fruit trees, grapevines, and personal
property used exclusively at a zoo, as well as categories, such
as pets, personal effects, and household furnishings. In 1980,
the Legislature exempted all business inventories from the
property tax, defined as items generally held for sale or lease
in the ordinary course of business.
Board of Equalization (BOE) and Assessors . In 1850, the
Legislature first directed county assessors to tax property;
however, assessors in different counties often applied different
tax rates and methods of assessment. The California
Constitution of 1879 created BOE to equalize property tax rates
and assessment practices among counties. As part of its
oversight role, BOE enacts rules and regulations which generally
bind county assessors; however, assessors can disagree with BOE.
If an assessor believes that BOE's interpretation is invalid,
he or she may bring a so-called "538 action" against BOE in
court for declaratory relief instead of applying BOE's rule or
CONTINUED
AB 777
Page
4
regulation. Because BOE rules clarify current law, they
generally apply retroactively to any fiscal year within the
statute of limitations.
BOE Property Tax Rule 133 details the business inventory
exemption, including a list of items explicitly defined as
business inventory, such as containers, oak barrels used in
making wine and brandy, and crops and animals used in production
of food and fiber. The Rule states that property used to
deliver professional services such as law, medicine, or
architecture is taxable.
SpaceX . Founded by noted entrepreneur Elon Musk in 2002, SpaceX
constructs rockets that deliver satellites into space as well as
spacecraft that carries cargo to the International Space
Station. Headquartered in Hawthorne, CA, SpaceX is the first
private company to launch a rocket into orbit, among other
milestones, and plans to reuse its rockets someday.
In 2012, the Los Angeles County Assessor audited SpaceX, and
noticed property in a site visit that wasn't listed in its
Business Property Statement, the form taxpayers use to
self-report personal property to the Assessor. In February
2013, Los Angeles County issued SpaceX an assessment for that
property for all years within the statute of limitations, back
to the 2007-08 fiscal year. SpaceX appealed the assessment to
the Los Angeles County Assessment Appeals Board. The County
Clerk has not yet scheduled the appeal for hearing.
In addition to the appeal, SpaceX is seeking regulatory change
from BOE, which issued an advisory, non-binding opinion in
December, 2013, stating that SpaceX's equipment qualifies for
the inventory exemption. Additionally, BOE initiated a
discussion of proposed revisions to Rule 133 to add specified
space flight property to its list of items explicitly defined as
exempt business inventory. SpaceX wants space flight property
exempted from the personal property tax by statute.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee, currently, one
county assessor is assessing tax on space flight materials, and
subsequent appeals and related activity are pending.
CONTINUED
AB 777
Page
5
Consequently, under existing law and regulations, this bill is
estimated to result in a reduction of local property tax revenue
of roughly $1 million annually. Under Proposition 98, this
reduction in local property tax revenues would lead to an
increase in state General Fund support for K-14 education of
approximately 40 to 50%, or potentially $500,000 annually. The
exact amount will depend on the specific factors which determine
the annual Proposition 98 minimum funding guarantee.
SUPPORT : (Verified 4/9/14)
SpaceX (source)
Aerojet Rocketdyne
Aerospace and Defense Forum
Board of Equalization
California Chamber of Commerce
California Manufacturers and Technology Association
California Unmanned Aircraft System
China Lake Alliance
City of Hawthorne
Commercial Space Flight Federation
El Camino Community College District
Kern County
Lockheed Martin Space Systems Company
Los Angeles Area Chamber of Commerce
Los Angeles County Economic Development Corporation
Mojave Air and Space Port
Northrop Grumman Aerospace Systems
Palos Verdes Peninsula Chamber of Commerce
Redondo Beach Chamber of Commerce
South Bay Association of Chambers of Commerce
Torrance Area Chamber of Commerce
OPPOSITION : (Verified 4/8/14)
Santa Clara County Assessor Lawrence Stone
ARGUMENTS IN SUPPORT : According to the author, "Space
exploration, until very recently, was an entirely government run
industry. However, in recent years, California has seen the
emergence of private space companies that put our state at the
forefront of innovation and technology. These private companies
are not only creating the most advanced space vehicles, but are
also significantly contributing to the state's economy and our
CONTINUED
AB 777
Page
6
local communities. Despite the ground-breaking advances made by
the aerospace industry, California has yet to adapt modern tax
policies that reflect the realities of this burgeoning sector.
Recently, the Los Angeles County Assessor stated that propulsion
systems - rockets used for space travel - are considered
"business supplies" and are therefore subject to property tax.
Space X, for example, recently received a $2 million tax bill
for the storage of two propulsion systems. However, rockets
should not be considered business supplies as they are a part of
a transportation service provided, and are lost or destroyed in
orbit after launch and do not return to Earth. Previously,
these propulsion systems have never been taxed and represent a
significant cost for the space industry, because they are only
used once. Nevertheless, these un-expected enormous tax
liabilities represent a devastating cost for this important
California industry and could potentially cause businesses and
jobs to leave the state."
ARGUMENTS IN OPPOSITION : According to the Santa Clara County
Assessor, "If this legislation becomes law, it will send a
dangerous message to corporations, encouraging them to bypass
the local property tax system, including the assessment appeals
process. In effect, it encourages the creation of two property
tax systems, one for the small business owner or homeowner, and
another for those major corporations who can afford to lobby
their legislator. As Assessor, I have strenuously opposed the
creation of different sets of rules for different taxpayers that
are unrelated to the market place."
ASSEMBLY FLOOR : 69-5, 1/29/14
AYES: Achadjian, Alejo, Allen, Atkins, Bigelow, Bloom,
Bocanegra, Bonta, Bradford, Brown, Ian Calderon, Campos, Chau,
Chávez, Chesbro, Conway, Cooley, Dababneh, Dahle, Daly,
Dickinson, Donnelly, Fong, Fox, Frazier, Beth Gaines, Garcia,
Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Hall,
Harkey, Roger Hernández, Holden, Jones, Jones-Sawyer, Levine,
Linder, Lowenthal, Maienschein, Mansoor, Medina, Melendez,
Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan,
Patterson, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon,
Ridley-Thomas, Rodriguez, Salas, Wagner, Waldron, Weber,
Wieckowski, Wilk, Williams, John A. Pérez
NOES: Ammiano, Buchanan, Gatto, Stone, Ting
NO VOTE RECORDED: Bonilla, Eggman, Logue, Perea, Skinner,
Yamada
CONTINUED
AB 777
Page
7
AB:d 4/9/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED