BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 1422 HEARING: 7/3/13 AUTHOR: Committee on Jobs, Economic Development & the Economy VERSION: 6/19/13 FISCAL: Yes CONSULTANT: Miller TAX LEVY: No CALIFORNIA ALTERNATIVE ENERGY & ADVANCED TRANSPORTATION FINANCING AUTHORITY: PARTICIPATING PARTY Makes several changes to the CAEATFA program within the Treasurer's Office. Background and Existing Law The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) provides financing through conduit or revenue bonds, loan guarantees, loan loss reserves and a sales and use tax exemption for facilities that use alternative energy sources and technologies. CAEATFA also provides these financing mechanisms for facilities needed to develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs. CAEATFA's board, composed of the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission, decides which projects to assist. On March 24, 2010, Governor Arnold Schwarzenegger signed SB 71 (Padilla) which authorizes the CAEATFA to provide eligible projects financial assistance in the form of a sales and use tax exemption on property used for the "design, manufacture, production, or assembly" of either advanced transportation technologies or alternative energy source products, components or system. Prior to the passage of SB 71, Governor Schwarzenegger used CAEATFA to assist a joint venture between Tesla Motors and Toyota Motors to purchase the NUMMI assembly plant in Fremont, California where the two companies focus on manufacturing hybrid and electric vehicles, including the TESLA brand. AB 1422 -- 6/19/13 -- Page 2 The SB 71 program promotes the creation of California-based manufacturing, California-based jobs, and the reduction of greenhouse gases, air and water pollution, or energy consumption. To date, CAEATFA has approved financial assistance for private entities in the following fields: electric vehicle manufacturing, solar photovoltaic manufacturing, landfill gas capture and production, biogas capture and production (dairies and waste water treatment plants), demonstration hydrogen fuel production, electric vehicle battery manufacturing, biomass processing and fuel production, and others. Last year, the Legislature added "advanced manufacturing" to the list of projects eligible for the exemption, and capped the amount of exemptions awarded annually to $100 million. The Legislature also approved a study by GO-Biz in conjunction with the study (SB 1128, Padilla). The Treasurer's office provides the following estimates of awards "drawn down" or actually used: 2010: $16.8 M 2011: $21.7 M 2012: $10.5 M 2013: $4.2 M Eligibility Criteria . Applicants must show the property to be purchased will be used to design, manufacture, produce or assemble an eligible advanced transportation technology or alternative source product - including energy efficiency - component or system. Each applicant must pass the "net benefits test," by showing that the new project's environmental and economic benefits exceed the fiscal loss of granting the exemption. Applicants are awarded the sales and use tax exemption by CAEATFA and are all publicly disclosed on their website and in annual report documents. This definition includes manufacturers of alternative source electricity generation equipment such as solar panels or wind turbines, but it excludes the purchase of that equipment for power generation. Sales & Use Tax Exemption for manufacturing . AB 93 (Committee on Budget, 2013) passed by the Senate on June 25, 2013 allows for an exemption from the state portion (4.19%) of the sales and use tax, beginning July 1, 2014 and before AB 1422 -- 6/19/13 -- Page 3 January 1, 2019 for state wide purchases or before July 1, 2121 for purchases made in the former enterprise zones or areas of high unemployment and poverty according the US Census. The exemption will be limited annually to the first $200 million of eligible purchases by a qualified purchaser defined as manufac turers or processors engaged in manufacturing, research & development or processing according to the North American Industry Classification System (NA ICS), but excluding extractive industries: NAICS Codes 3111 through 3399 include all establishments primarily engaged in manufacturing activities. This encompasses manufacturers in the aerospace sector, textiles, pharmaceuticals, printing, food and others. NAICS Code 541711 includes establishments primarily engaged in conducting biotechnology research and experimental development. This encompasses industries using microorganisms and cellular and bio-molecular processes to develop or alter materials. NAICS Code 541712 includes establishments primarily engaged in conducting research and experimental development in the physical, engineering and life sciences. This encompasses activities in agriculture, electronics, environmental biology, botany, computers, chemistry, food, fisheries, forest, geology, health, mathematics, medicine, oceanography, pharmacy, physics, veterinary and other allied fields. Qualified tangible personal property must be used at least 50% of the time by the qualified purchaser in any stage of manufacturing, processing, refining, fabricating, or recycling of tangible personal property; for purposes of research and development; to maintain, repair, measure, or test tangible personal property; and, if purchased by a contractor, used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or AB 1422 -- 6/19/13 -- Page 4 as a research and storage facility for use in connection with those processes. Qualifying purchases that are removed from the state, or used for unqualified activities, within one year of the purchase will be subject to a 'claw-back' equal to the value of the SUT exemption. The purchaser of the property will be liable for the payment of the sales or use tax that would otherwise have been collected from the seller absent the provision of the exemption. Proposed Law Assembly Bill 1422 makes several changes to the CAEATFA statute to clarify existing law, broaden aspects of the program within the cap, and changes aspects of the cap. AB 1422 clarifies that an entity that is located outside the state, including those located overseas, is considered a "participating party" for the purpose of the Finance Authority's sales tax exemption program if the equipment is purchased and utilized within the state (as amended). AB 1422 deletes a requirement that GO-Biz review and identify efficient and cost-effective methods for the state to create jobs in advanced manufacturing and report their findings to the Legislature by January 1, 2017. AB 1422 modifies the definition of advanced manufacturing to include either of the following rather than both of the following. 1. Systems that result from substantive advancement, beyond the current industry standard, in the production of materials and products. 2. Sustainable manufacturing systems and manufacturing technologies that minimize the use of resources while maintaining or improving cost and performance. These systems and manufacturing technologies may not include those required to be undertaken pursuant to state or federal law or regulations. AB 1422 requires that any portion of the $100 million not AB 1422 -- 6/19/13 -- Page 5 granted through the sales and use tax exclusion be available in the subsequent calendar year, but provides that the amount shall not exceed $200 million. State Revenue Impact Unknown. Comments 1. Purpose of the bill . AB 1422 is the Assembly Committee on Jobs, Economic Development, and the Economy's code maintenance and technical clean-up bill for programs administered through the California Alternative Energy and Advanced Transportation Financing Authority. Each of the issues has been brought forward by one or more stakeholder groups. Language in the bill has been developed in consultation with the Senate and Assembly policy committees which also oversee the programs of the Authority. 2. Amendments . The author will take amendments in committee to clarify that property must be purchased and used in this state as follows: (8)(A)"Project" means a land, building, improvement to the land or building, rehabilitation, work, property, or structure, real or personal, stationary or mobile, including, but not limited to, machinery and equipment purchased and utilized in the state , whether or not in existence or under construction, that utilizes, or is designed to utilize, an alternative source, or that is utilized for the design, technology transfer, manufacture, production, assembly, distribution, or service of advanced transportation technologies or alternative source components. (B)"Project," for purposes of Section 26011.8 and Section 6010.8 of the Revenue and Taxation Code, means tangible personal property that is
utilizedpurchased and utilized in the state for the design, manufacture, production, or assembly of advanced manufacturing, advanced transportation technologies, or alternative source products, components, or systems. AB 1422 -- 6/19/13 -- Page 6 Assembly Actions Assembly Jobs, Economic Development & the Economy9 -0 Assembly Revenue & Taxation 8-0 Assembly Appropriations 17-0 Assembly Floor 70-0 Support and Opposition (6/27/13) Support : Unknown. Opposition : Unknown.