BILL ANALYSIS Ó 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