BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1422
                                                                  Page  1


          Date of Hearing:  April 29, 2013

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

               AB 1422 (Jobs, Economic Development & the Economy) - As  
                              Amended:  April 15, 2013

          Majority vote.  Fiscal committee.

           SUBJECT  :  California Alternative Energy and Advanced  
          Transportation Financing Authority (CAEATFA or the 'Authority'):  
           participating party.

           SUMMARY  :  Revises the definition of "participating party" for  
          purposes of the sales and use tax (SUT) exemption to include  
          out-of-state and overseas entities.  Specifically,  this bill  :   

          1)Specifies that an entity located outside the state, including  
            an entity located overseas, that commits to and demonstrates  
            that it will be opening a manufacturing facility in the state  
            may qualify for:

             a)   The SUT exemption as a "participating party"; and,  

             b)   Financial assistance pursuant to Revenue and Taxation  
               Code (R&TC) Section 26011.8.

          2)Declares the legislative intent to clarify existing law and to  
            ensure that an out-of-state entity or overseas entity is  
            eligible to apply for financial assistance. 

          3)Repeals the requirement for the Governor's Office of Business  
            and Economic Development to report to the Legislature by  
            January 1, 2017, regarding the most efficient and  
            cost-effective methods for the state to create jobs in  
            advanced manufacturing. 

          4)Makes technical clarifying changes related to the definition  
            of "advanced manufacturing." 

           EXISTING LAW  :

          1)Creates CAEATFA for the purpose of promoting the development  








                                                                  AB 1422
                                                                  Page  2

            and utilization of alternative energy sources and the  
            development and commercialization of advanced transportation  
            technologies. 

          2)Imposes a sales tax on a retailer's gross receipts from the  
            retail sale of tangible personal property (TPP) in this state,  
            unless the sale is specifically exempt from taxation by  
            statute.  It is presumed that gross receipts from a particular  
            sale of TPP are subject to tax, unless the seller can  
            establish either that the sale was not a retail transaction or  
            that the sale is subject to an exemption.  

          3)Allows CAEATFA to grant a SUT exclusion to eligible projects,  
            as defined, on property purchased by a "participating party"  
            for the "design, manufacture, production, or assembly" of  
            advanced transportation technologies or alternative energy  
            source products, components or system, as defined.   Provides  
            that "advanced manufacturing" projects, as defined, are also  
            eligible for the SUT exemption until July 1, 2016. 

          4)States that the total amount of SUT exemptions granted for  
            "projects", as defined, approved by CAEATFA in each calendar  
            year may not exceed $100 million.  

          5)Requires the Legislative Analyst's Office (LAO) to report to  
            the Joint Legislative Budget Committee on the effectiveness of  
            this program, on or before January 1, 2019.

          6)Requires CAEATFA to do all of the following:

             a)   Publish notice of the availability of project  
               applications and deadlines for submission of project  
               applications to the Authority.

             b)   Evaluate project applications based upon a "net  
               benefits" test, as provided. 

             c)   Study the efficacy and cost benefit of the SUT exemption  
               as it relates to advanced manufacturing projects.  The  
               study shall include the number of jobs created, the costs  
               of each job, and the annual salary of each job.  The study  
               shall also consider a dynamic analysis of the economic  
               output to the state that would occur without the SUT  
               exemption. 









                                                                  AB 1422
                                                                  Page  3

             d)   Submit to the Legislature, prior to January 1, 2017, a  
               report outlining the results of the study.  

             e)   Work with the University of California or the California  
               State University, before January 1, 2014, and within six  
               months of any significant change to the net benefits test,  
               to perform a peer review of the net benefits test currently  
               used to evaluate applicants applying for the program.

             f)   Submit to the Legislature an interim report on the  
               efficacy of the program before January 1, 2015.  The  
               Authority may work with the LAO in preparing the report and  
               its recommendations. 

          7)Requires the Governor's Office of Business and Economic  
            Development to review and identify efficient and  
            cost-effective methods for the state to create jobs in  
            advanced manufacturing, as specified, and to report its  
            findings to the Legislature on or before January 1, 2017. 

          8)Sunsets the CAEATFA's expanded authority to approve  
            alternative energy sources or technologies projects on January  
            1, 2021.

           FISCAL EFFECT  :  Unknown.  

           COMMENTS  :   

           1)The Author's Statement  .  According to the staff of the  
            Assembly Committee on Jobs, Economic Development, and the  
            Economy, AB 1422 is intended to provide necessary  
            clarification for efficient administration of the CAEATFA, the  
            purpose of which is to attract new manufacturing facilities to  
            be built in California.  AB 1422 will maximize the  
            effectiveness of the CAEATFA and attract much-needed jobs to  
            our state.  It will also cut administrative costs by repealing  
            a reporting requirement that has been identified as being  
            unnecessary burdensome. 

           2)CAEATFA:  Background  .  According to the Senate Energy,  
            Utilities, and Communications Committee, the California  
            Alternative Energy Source Financing Authority was established  
            in 1980 with an authorization of $200 million in revenue bonds  
            to finance projects utilizing alternative or renewable energy  
            sources, such as wind, solar, co-generation and geothermal.   








                                                                  AB 1422
                                                                  Page  4

            In 1994, the authority was renamed as CAEATFA and its charge  
            was expanded to include the financing of "advanced  
            transportation" technologies.  During the energy crisis of  
            2001, CAEATFA's authority was expanded again to provide  
            financial assistance to public power entities, independent  
            generators, and others for new and renewable energy sources,  
            and to develop clean distributed generation.  Last year, the  
            Legislature also temporarily authorized CAEATFA, until July 1,  
            2016, to grant financial assistance to eligible projects that  
            promote the utilization of "advanced manufacturing," as  
            defined [SB 1128 (Padilla), Chapter 677, Statutes of 2012]. 

            The CAEATFA board consists of five members:  the Treasurer,  
            Controller, Director of Finance, Chairperson of the Energy  
            Commission, and President of the Public Utilities Commission.   


            CAEATFA may provide financial assistance to approved projects  
            via the issuance of bond insurance loan guarantees.  Over the  
            last few years, CAEATFA has provided financial assistance  
            through various programs, including qualified energy  
            conservation bonds for projects that promote the use of  
            alternative energy and energy efficiency in state, local and  
            tribal government facilities as well as clean renewable energy  
            bonds for renewable energy projects.  In addition, with the  
            passage of SB 71 (Padilla), Chapter 10, Statutes of 2010,  
            CAEATFA is authorized, until January 1, 2021, to grant a SUT  
            exemption for the purchase of equipment that is used for the  
            design, manufacture, production, or assembly of "advanced  
            transportation technologies" or "alternative source" products,  
            components, or systems (SB 71 Program).  

           3)The SB 71 Program  .  According to the CAEATFA's 2012 annual  
            report to the Legislature, as of December 31, 2012, 50  
            projects had been approved under the SB 71 Program since its  
            inception.  The approved projects include, among others,  
            electric vehicles and solar photovoltaic manufacturing,  
            biomass processing and fuel production, and biogas capture and  
            production.  Out of those 50 projects, 10 are inactive and are  
            not moving forward.  The 40 active projects have been approved  
            for $1.16 billion in anticipated qualified property purchases,  
            estimated to result in approximately $98.5 million in SUT  
            exemptions.  These projects are located across 14 counties.   
            The CAEATFA staff estimated that the projects would produce  
            $72.5 million in environmental benefits and $125.7 million in  








                                                                  AB 1422
                                                                  Page  5

            fiscal benefits, resulting in approximately $99.7 million of  
            "net benefits."  In 2012, 24 projects purchased equipment that  
            resulted in approximately $10.5 million of SUT exclusions. 

           4)The Expansion of the SUT Exclusion.   Last year, SB 1128  
            temporarily, until July 1, 2016, expanded CAEATFA's authority  
            under the SB 71 Program to grant a SUT exemption for eligible  
            projects that promote the utilization of "advanced  
            manufacturing," as defined.  It revised the definition of  
            eligible project for purposes of the SB 71 Program to include  
            "advanced manufacturing" and clarified that only those  
            projects that are authorized under the SB 71 Program qualify  
            for the SUT exemption.  

          SB 1128 also revised R&TC Section 6010.8, which authorizes the  
            SUT exemption, to allow a "participating party" to purchase or  
            lease qualified TPP directly from the seller, removing the  
            need for CAEATFA to act as an intermediary.  Prior to 2013, in  
            order to qualify for the exemption, the participating party  
            had to purchase the property without payment of tax and then  
            resell the equipment to CAEATFA.  The transfer was excluded  
            from the SUT as a transfer from a participating party to  
            CAEATFA.  The participating party and CAEATFA would then enter  
            into a lease agreement and upon complete installation of the  
            TPP, ownership of that property would be transferred from the  
            CAEATFA to the participating party.  Alternatively, CAEATFA  
            was able to purchase the specified equipment on behalf of the  
            participating party, financing the purchase through a bond or  
            loan, and the participating party would lease the equipment  
            from CAEATFA.  As the purchaser of the equipment, the CAEATFA  
            paid no sales tax on the purchase, nor was it required to  
            collect the use tax on the lease receipts.  SB 1128 simplified  
            these complicated sale-lease transactions that are not  
            feasible for business reasons, by providing that a lease or  
            transfer of TPP constituting a "project" under the SB 71  
            Program to a participating party is neither a "sale" nor "use"  
            and, thus, is exempt from the SUT.  

          The term "participating party" means, among others, a person,  
            federal or state agency, city or county, state college or  
            university, school district or other political entity engaged  
            in the business or operations in the state, whether for profit  
            or non-profit, that applies for financial assistance from the  
            Authority for the purpose of implementing a project.  Existing  
            law does not expressly state whether a participating party  








                                                                  AB 1422
                                                                  Page  6

            needs to be a California-based company.  Arguably,  
            out-of-state companies have as much potential as  
            in-state-companies to create manufacturing jobs in the state  
            to fulfill the purpose of the SUT exemption, which is to  
            promote creation of manufacturing jobs in California and  
            incentivize manufacturing of green technologies.  However, the  
            Authority has interpreted the definition of "participating  
            party" to exclude out-of-state entities that wish to engage in  
            eligible projects.  AB 1422 seeks to overturn this  
            interpretation to allow an otherwise qualified out-of-state  
            entity to apply for financial assistance and the SUT  
            exclusion.  The entity, however, must commit and demonstrate  
            that it will be opening a manufacturing facility in  
            California.   

          Existing law imposes an annual cap of $100 million on the amount  
            of SUT exclusions that may be granted to eligible projects,  
            and therefore, the proposed change to the definition of  
            "participating party" will not result in an additional General  
            Fund revenue loss. 

           5)Too Many Reports?   Every year, in accordance with the  
            provisions of Public Resources Code (PRC) Sections 26017 and  
            16141, the CAEATFA is required to submit its annual report on  
            program activities.  The annual report contains information on  
            the Authority's revenues and expenditures for fiscal years and  
            projects the Authority's need for the coming fiscal year.  It  
            also includes an overview of program activity on the Advanced,  
            Transportation and Alternative Source Manufacturing SUT  
            Exclusion Program, and status of the SUT exclusion for Tesla  
            Motors. 

          Furthermore, CAEATFA is also required to study the efficacy and  
            cost benefit of the SUT exemption as it relates to advanced  
            manufacturing projects.  The study must include the number of  
            jobs created, the costs of each job, and the annual salary of  
            each job and must consider a dynamic analysis of the economic  
            output to the state that would occur without the exclusion.   
            The Authority must submit to the Legislature, prior to January  
            1, 2017, a report outlining the results of the study.  The  
            Authority must also work with the University of California or  
            the California State University before January 1, 2014, and  
            within six months of any significant change to the net  
            benefits test, to perform a peer review of the net benefit  
            test currently used to evaluate applicants applying for the  








                                                                  AB 1422
                                                                  Page  7

            program.  In addition, the Authority is required to submit to  
            the Legislature an interim report, before January 1, 2015, on  
            efficacy of granting the SUT exemption for projects and  
            recommendations on changes that would increase the efficacy in  
            creating jobs and whether the exemption should be expanded or  
            narrowed to other manufacturing types.  The Authority may work  
            with the LAO in preparing the report and its recommendations. 

          The LAO is required to prepare and submit a report to the Joint  
            Legislative Budget Committee on the effectiveness of the SUT  
            Exclusion Program on or before January 1, 2019, pursuant to  
            the PRC Section 26011.8(g).  

            Finally, the Governor's Office of Business and Economic  
            Development is also under an obligation to review and identify  
            efficient and cost-effective methods for the state to create  
            jobs in advanced manufacturing, as specified, and to report  
            its findings to the Legislature on or before January 1, 2017.   


            This bill proposes to eliminate the latter reporting  
            requirement relating to the Governor's Office of Business and  
            Economic Development.  According to the author's office, the  
            Governor signed SB 1128 on the condition that this reporting  
            requirement be removed.  

           6)Double-Referral  .  This bill is double-referred with the  
            Assembly Committee on Jobs, Economic Development, and the  
            Economy.  AB 1422 passed out of that Committee on a 9-0 vote. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file        

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)  
          319-2098 











                                                                  AB 1422
                                                                  Page  8