Amended in Assembly April 1, 2014

California Legislature—2013–14 Regular Session

Assembly Bill No. 1997

Introduced by Assembly Member Gorell

February 20, 2014

begin delete An act relating to unmanned aircraft systems. end delete begin insert An act to amend Section 6377.1 of, and to add and repeal Sections 17053.83 and 23623.3 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. end insert

LEGISLATIVE COUNSEL’S DIGEST

AB 1997, as amended, Gorell. begin delete Unmanned aircraft systems. end delete begin insert Sales and use taxes: exemptions: unmanned aerial vehicle manufacturing: income taxes: credits: hiring. end insert

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The Sales and Use Tax Law imposes a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state, and provides various exemptions from the taxes imposed by that law.

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Existing law includes an exemption from those taxes, on and after July 1, 2014, and before January 1, 2022, for the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person, including persons engaged in aircraft manufacturing, for use primarily in manufacturing, processing, refining, fabricating, or recycling of property, or research and development, and qualified tangible personal property purchased for use by a contractor for specified purposes, as provided. Existing law specifies that this exemption does not apply to local sales and use taxes, transactions and use taxes, and specified state taxes from which revenues are deposited into the Local Public Safety Fund, the Education Protection Account, the Local Revenue Fund, the Fiscal Recovery Fund, or the Local Revenue Fund 2011.

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This bill, on and after January 1, 2015, would instead provide that the exemption also applies to local sales and use taxes and those specified state taxes with respect to qualified tangible personal property purchased by a qualified person that is engaged in aircraft manufacturing of unmanned aerial vehicles.

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The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Amendments to state sales and use taxes are incorporated into these laws.

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Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

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This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

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The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

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This bill would allow, under both laws, for taxable years beginning on or after January 1, 2015, and before January 1, 2025, a credit in an amount equal to a specified percentage of the qualified wages, as defined, paid or incurred by a qualified taxpayer that manufactures unmanned aerial vehicles with respect to qualified employees, as defined, during the taxable year, not to exceed $20,000 per year, per qualified employee.

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 This bill would take effect immediately as a tax levy.

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Existing federal law, the Federal Aviation Administration Modernization and Reform Act of 2012, provides for the integration of civil unmanned aircraft systems, commonly known as drones, into the national airspace system by September 30, 2015. Existing federal law requires the Administrator of the Federal Aviation Administration to develop and implement operational and certification requirements for the operation of public unmanned aircraft systems in the national airspace system by December 31, 2015.

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This bill would state the intent of the Legislature to enact legislation that would provide incentives to unmanned aircraft system manufacturers that manufacture those systems in this state, in order to capture and develop the incredible future growth of the unmanned aircraft system manufacturing industry within California. The bill would also define “unmanned aircraft system” for those purposes.

end delete

Vote: majority. Appropriation: no. Fiscal committee:  begin delete no end delete begin insert yes end insert . State-mandated local program: no.

The people of the State of California do enact as follows:

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begin insert SECTION 1. end insert   

end insert

begin insert Section 6377.1 of the end insert begin insert Revenue and Taxation Code end insert
begin insert is amended to read: end insert

6377.1.  

(a) Except as provided in subdivision (e), on or after
July 1, 2014, and before July 1, 2022, there are exempted from the
taxes imposed by this part the gross receipts from the sale of, and
the storage, use, or other consumption in this state of, any of the
following:

(1) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in any stage of the
manufacturing, processing, refining, fabricating, or recycling of
tangible personal property, beginning at the point any raw materials
are received by the qualified person and introduced into the process
and ending at the point at which the manufacturing, processing,
refining, fabricating, or recycling has altered tangible personal
property to its completed form, including packaging, if required.

(2) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in research and
development.

(3) Qualified tangible personal property purchased for use by
a qualified person to be used primarily to maintain, repair, measure,
or test any qualified tangible personal property described in
paragraph (1) or (2).

(4) Qualified tangible personal property purchased for use by
a contractor purchasing that property for use in the performance
of a construction contract for the qualified person, that will use
that property as an integral part of the manufacturing, processing,
refining, fabricating, or recycling process, or as a research or
storage facility for use in connection with those processes.

(b) For purposes of this section:

(1) “Fabricating” means to make, build, create, produce, or
assemble components or tangible personal property to work in a
new or different manner.

(2) “Manufacturing” means the activity of converting or
conditioning tangible personal property by changing the form,
composition, quality, or character of the property for ultimate sale
at retail or use in the manufacturing of a product to be ultimately
sold at retail. Manufacturing includes any improvements to tangible
personal property that result in a greater service life or greater
functionality than that of the original property.

(3) “Primarily” means 50 percent or more of the time.

(4) “Process” means the period beginning at the point at which
any raw materials are received by the qualified person and
introduced into the manufacturing, processing, refining, fabricating,
or recycling activity of the qualified person and ending at the point
at which the manufacturing, processing, refining, fabricating, or
recycling activity of the qualified person has altered tangible
personal property to its completed form, including packaging, if
required. Raw materials shall be considered to have been
introduced into the process when the raw materials are stored on
the same premises where the qualified person’s manufacturing,
processing, refining, fabricating, or recycling activity is conducted.
Raw materials that are stored on premises other than where the
qualified person’s manufacturing, processing, refining, fabricating,
or recycling activity is conducted shall not be considered to have
been introduced into the manufacturing, processing, refining,
fabricating, or recycling process.

(5) “Processing” means the physical application of the materials
and labor necessary to modify or change the characteristics of
tangible personal property.

(6) (A) “Qualified person” means a person that is primarily
engaged in those lines of business described in Codes 3111 to
3399, inclusive, 541711, or 541712 of the North American Industry
Classification System (NAICS) published by the United States
Office of Management and Budget (OMB), 2012 edition.

(B) Notwithstanding subparagraph (A), “qualified person” shall
not include either of the following:

(i) An apportioning trade or business that is required to apportion
its business income pursuant to subdivision (b) of Section 25128.

(ii) A trade or business conducted wholly within this state that
would be required to apportion its business income pursuant to
subdivision (b) of Section 25128 if it were subject to apportionment
pursuant to Section 25101.

(7) (A) “Qualified tangible personal property” includes, but is
not limited to, all of the following:

(i) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.

(ii) Equipment or devices used or required to operate, control,
regulate, or maintain the machinery, including, but not limited to,
computers, data-processing equipment, and computer software,
together with all repair and replacement parts with a useful life of
one or more years therefor, whether purchased separately or in
conjunction with a complete machine and regardless of whether
the machine or component parts are assembled by the qualified
person or another party.

(iii) Tangible personal property used in pollution control that
meets standards established by this state or any local or regional
governmental agency within this state.

(iv) Special purpose buildings and foundations used as an
integral part of the manufacturing, processing, refining, fabricating,
or recycling process, or that constitute a research or storage facility
used during those processes. Buildings used solely for warehousing
purposes after completion of those processes are not included.

(B) “Qualified tangible personal property” shall not include any
of the following:

(i) Consumables with a useful life of less than one year.

(ii) Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products that have
completed the manufacturing, processing, refining, fabricating, or
recycling process.

(iii) Tangible personal property used primarily in administration,
general management, or marketing.

(8) “Refining” means the process of converting a natural
resource to an intermediate or finished product.

(9) “Research and development” means those activities that are
described in Section 174 of the Internal Revenue Code or in any
regulations thereunder.

(10) “Useful life” for tangible personal property that is treated
as having a useful life of one or more years for state income or
franchise tax purposes shall be deemed to have a useful life of one
or more years for purposes of this section. “Useful life” for tangible
personal property that is treated as having a useful life of less than
one year for state income or franchise tax purposes shall be deemed
to have a useful life of less than one year for purposes of this
section.

(c) An exemption shall not be allowed under this section unless
the purchaser furnishes the retailer with an exemption certificate,
completed in accordance with any instructions or regulations as
the board may prescribe, and the retailer retains the exemption
certificate in its records and furnishes it to the board upon request.

(d) (1)  begin insert (A) end insert begin insert   end insert Notwithstanding the Bradley-Burns Uniform Local
Sales and Use Tax Law (Part 1.5 (commencing with Section 7200))
and the Transactions and Use Tax Law (Part 1.6 (commencing
with Section 7251)), the exemption established by this section
shall not apply with respect to any tax levied by a county, city, or
district pursuant to, or in accordance with, either of those laws.

begin delete

(2)

end delete

begin insert (B) end insert  Notwithstanding subdivision (a), the exemption established
by this section shall not apply with respect to any tax levied
pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant
to Section 35 of Article XIII of the California Constitution, or any
tax levied pursuant to Section 6051 or 6201 that is deposited in
the State Treasury to the credit of the Local Revenue Fund 2011
pursuant to Section 6051.15 or 6201.15.

begin insert

(2) On and after January 1, 2015, paragraph (1) shall not apply
to qualified tangible personal property purchased for use by a
qualified person primarily engaged in the line of business described
in Industry Group 336411 of the North American Industry
Classification System (NAICS) published by the United States
Office of Management and Budget (OMB), 2012 edition, that
manufactures unmanned aerial vehicles.

end insert

(e) (1) The exemption provided by this section shall not apply
to either of the following:

(A) Any tangible personal property purchased during any
calendar year that exceeds two hundred million dollars
($200,000,000) of purchases of qualified tangible personal property
for which an exemption is claimed by a qualified person under
this section. For purposes of this subparagraph, in the case of a
qualified person that is required to be included in a combined report
under Section 25101 or authorized to be included in a combined
report under Section 25101.15, the aggregate of all purchases of
qualified personal property for which an exemption is claimed
pursuant to this section by all persons that are required or
authorized to be included in a combined report shall not exceed
two hundred million dollars ($200,000,000) in any calendar year.

(B) The sale or storage, use, or other consumption of property
that, within one year from the date of purchase, is removed from
California, converted from an exempt use under subdivision (a)
to some other use not qualifying for exemption, or used in a manner
not qualifying for exemption.

(2) If a purchaser certifies in writing to the seller that the tangible
personal property purchased without payment of the tax will be
used in a manner entitling the seller to regard the gross receipts
from the sale as exempt from the sales tax, and the purchase
exceeds the two-hundred-million-dollar ($200,000,000) limitation
described in subparagraph (A) of paragraph (1), or within one year
from the date of purchase, the purchaser removes that property
from California, converts that property for use in a manner not
qualifying for the exemption, or uses that property in a manner
not qualifying for the exemption, the purchaser shall be liable for
payment of sales tax, with applicable interest, as if the purchaser
were a retailer making a retail sale of the tangible personal property
at the time the tangible personal property is so purchased, removed,
converted, or used, and the cost of the tangible personal property
to the purchaser shall be deemed the gross receipts from that retail
sale.

(f) This section shall apply to leases of qualified tangible
personal property classified as “continuing sales” and “continuing
purchases” in accordance with Sections 6006.1 and 6010.1. The
exemption established by this section shall apply to the rentals
payable pursuant to the lease, provided the lessee is a qualified
person and the tangible personal property is used in an activity
described in subdivision (a).

(g) (1) Upon the effective date of this section, the Department
of Finance shall estimate the total dollar amount of exemptions
that will be taken for each calendar year, or any portion thereof,
for which this section provides an exemption.

(2) No later than each March 1 next following a calendar year
for which this section provides an exemption, the board shall
provide to the Joint Legislative Budget Committee a report of the
total dollar amount of exemptions taken under this section for the
immediately preceding calendar year. The report shall compare
the total dollar amount of exemptions taken under this section for
that calendar year with the department’s estimate for that same
calendar year. If that total dollar amount taken is less than the
estimate for that calendar year, the report shall identify options for
increasing exemptions taken so as to meet estimated amounts.

(h) This section is repealed on January 1, 2023.

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begin insert SEC. 2. end insert   

end insert

begin insert Section 17053.83 is added to the end insert begin insert Revenue and Taxation
Code end insert begin insert , to read: end insert

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begin insert 17053.83. end insert   

(a) For each taxable year beginning on or after
January 1, 2015, and before January 1, 2025, there shall be
allowed as a credit against the “net tax,” as defined in Section
17039, to a qualified taxpayer who employs a qualified employee
during the taxable year in an amount equal to the following:

(1) Fifty percent of qualified wages paid or incurred during any
taxable year beginning on or after January 1, 2015, and before
January 1, 2017.

(2) Forty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2017, and before
January 1, 2019.

(3) Thirty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2019, and before
January 1, 2021.

(4) Twenty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2021, and before
January 1, 2023.

(5) Ten percent of qualified wages paid or incurred during any
taxable year beginning on or after January 1, 2023, and before
January 1, 2025.

(b) For purposes of this section:

(1) “Qualified taxpayer” means any taxpayer that is primarily
engaged in the line of business described in Industry Group 336411
of the North American Industry Classification System (NAICS)
published by the United States Office of Management and Budget
(OMB), 2012 edition, that manufactures unmanned aerial vehicles.

(2) “Qualified employee” means an individual who is hired by
the qualified taxpayer during the taxable year, whose services for
the qualified taxpayer are performed in this state and are at least
90 percent directly related to the qualified taxpayer’s line of
business described in Industry Group 336411 of the North
American Industry Classification System (NAICS) published by
the United States Office of Management and Budget (OMB), 2012
edition, manufacturing unmanned aerial vehicles.

(3) “Qualified wages” means that portion of wages paid or
incurred by the qualified taxpayer during the taxable year with
respect to qualified employees that are direct costs, as defined in
Section 263A of the Internal Revenue Code, allocable to property
manufactured in this state by the qualified taxpayer.

(c) The credit allowed by this section shall not exceed twenty
thousand dollars ($20,000) per year, per qualified employee. For
employees who are qualified employees for part of a taxable year,
the credit shall not exceed twenty thousand dollars ($20,000)
multiplied by a fraction, the numerator of which is the number of
months of the taxable year that the employee is a qualified
employee and the denominator of which is 12.

(d) In the case where the credit allowed by this section exceeds
the “net tax,” the excess may be carried over to reduce the “net
tax” in the following year, and seven succeeding years if necessary,
until the credit is exhausted.

(e) The credit allowed by this section shall be in lieu of any
other credit or deduction that the qualified taxpayer may otherwise
be allowed pursuant to this part.

(f) The Franchise Tax Board may prescribe rules, guidelines,
or procedures necessary or appropriate to carry out the purposes
of this section.

(g) This section shall remain in effect only until December 1,
2025, and as of that date is repealed.

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begin insert

begin insert SEC. 3. end insert   

end insert

begin insert Section 23623.3 is added to the end insert begin insert Revenue and Taxation
Code end insert begin insert , to read: end insert

begin insert

begin insert 23623.3. end insert   

(a) For each taxable year beginning on or after
January 1, 2015, and before January 1, 2025, there shall be
allowed as a credit against “tax,” as defined in Section 23036, to
a qualified taxpayer who employs a qualified employee during the
taxable year in an amount equal to the following:

(1) Fifty percent of qualified wages paid or incurred during any
taxable year beginning on or after January 1, 2015, and before
January 1, 2017.

(2) Forty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2017, and before
January 1, 2019.

(3) Thirty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2019, and before
January 1, 2021.

(4) Twenty percent of qualified wages paid or incurred during
any taxable year beginning on or after January 1, 2021, and before
January 1, 2023.

(5) Ten percent of qualified wages paid or incurred during any
taxable year beginning on or after January 1, 2023, and before
January 1, 2025.

(b) For purposes of this section:

(1) “Qualified taxpayer” means any taxpayer that is primarily
engaged in the line of business described in Industry Group 336411
of the North American Industry Classification System (NAICS)
published by the United States Office of Management and Budget
(OMB), 2012 edition, that manufactures unmanned aerial vehicles.

(2) “Qualified employee” means an individual who is hired by
the qualified taxpayer during the taxable year, whose services for
the qualified taxpayer are performed in this state and are at least
90 percent directly related to the qualified taxpayer’s line of
business described in Industry Group 336411 of the North
American Industry Classification System (NAICS) published by
the United States Office of Management and Budget (OMB), 2012
edition, manufacturing unmanned aerial vehicles.

(3) “Qualified wages” means that portion of wages paid or
incurred by the qualified taxpayer during the taxable year with
respect to qualified employees that are direct costs, as defined in
Section 263A of the Internal Revenue Code, allocable to property
manufactured in this state by the qualified taxpayer.

(c) The credit allowed by this section shall not exceed twenty
thousand dollars ($20,000) per year, per qualified employee. For
employees who are qualified employees for part of a taxable year,
the credit shall not exceed twenty thousand dollars ($20,000)
multiplied by a fraction, the numerator of which is the number of
months of the taxable year that the employee is a qualified
employee and the denominator of which is 12.

(d) In the case where the credit allowed by this section exceeds
the “tax,” the excess may be carried over to reduce the “tax” in
the following year, and seven succeeding years if necessary, until
the credit is exhausted.

(e) The credit allowed by this section shall be in lieu of any
other credit or deduction that the qualified taxpayer may otherwise
be allowed pursuant to this part.

(f) The Franchise Tax Board may prescribe rules, guidelines,
or procedures necessary or appropriate to carry out the purposes
of this section.

(g) This section shall remain in effect only until December 1,
2025, and as of that date is repealed.

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begin insert

begin insert SEC. 4. end insert   

end insert begin insert

Notwithstanding Section 2230 of the Revenue and
Taxation Code, no appropriation is made by this act and the state
shall not reimburse any local agency for any sales and use tax
revenues lost by it under this act.

end insert

begin insert

begin insert SEC. 5. end insert   

end insert begin insert

This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.

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SECTION 1.  

It is the intent of the Legislature to enact
legislation that would provide incentives to unmanned aircraft
system manufacturers that manufacture those systems in this state,
in order to capture and develop the incredible future growth of the
unmanned aircraft system manufacturing industry within
California. “Unmanned aircraft system” means an unmanned
aircraft and associated elements, including communication links
and the components that control the unmanned aircraft, that are
required for the pilot in command to operate safely and efficiently
in the national airspace system.

end delete