BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
SB 19 (Knight) - Sales and Use Tax: Exemption: Property For Use
In Space Flight
Amended: May 14, 2013 Policy Vote: G&F 7-0
Urgency: No Mandate: Yes
Hearing Date: May 23, 2013 Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: SB 19 would expand the current sales and use tax
(SUT) exemption for property used in space flight to include
property used to construct commercial launch facilities.
Fiscal Impact: This measure would result in an unknown revenue
loss, potentially in the tens of millions of dollars (General
Fund and special funds). Additionally, the Board of
Equalization (BOE) would incur administration costs, likely in
excess of $50,000, to advise affected retailers and contractors,
revise BOE's regulation and publications, and answer inquiries
from taxpayers and the general public.
Background: The aerospace industry in Southern California began
roughly 100 years ago. Over the last century, early aviation
pioneers in the region transitioned from small workshops to
large factories that produced bombers and fighters and employed
tens of thousands of Southern Californians. In 1933, all the
airplane factories in Southern California employed approximately
1,000 people combined. By November 1943, that number had risen
to 280,300 workers. After World War II, technological
innovations pioneered by the region's aerospace firms made the
industry an important driver of economic growth in Southern
California. However, with the end of the Cold War in the late
1980s came defense budget cuts and military base closures. In
response, the industry's largest firms contracted in a wave of
consolidations and, as a result, many smaller, second and third
tier contractors were forced to close their doors. The result
was the loss of thousands of jobs. According to the Employment
Development Department's Labor Market Information Division,
state employment in aerospace product and manufacturing declined
by nearly half, from 139,300 in 1993 to 70,800 in 2013; however,
almost the entire decline occurred between 1993 and 2004.
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The SUT is a tax on final sales of tangible personal property,
such as clothing, household furnishings, appliances, and motor
vehicles. Intermediate sales of goods (from a wholesaler to a
retailer, for example) are not taxed and, in addition, certain
individual items are specifically exempted from the SUT. The
largest of these tax expenditure programs (TEPs) involve
utilities and home-consumed food. California's state-level SUT
was established in the 1930s and its local SUT in 1955.
Except where a specific exemption or exclusion is provided,
current law imposes the sales tax on all retailers for the
privilege of selling tangible personal property at retail in
this state or the use tax on the storage, use, or other
consumption in this state of tangible personal property (TPP)
purchased from a retailer.
Current law exempts from the sales and use tax purchases of
qualified property for use in space flight. "Space flight" means
any flight designed for suborbital, orbital, or interplanetary
travel by a space vehicle, satellite, space facility, or space
station of any kind. "Qualified property" consists of:
TPP that has space flight capability. This includes such
things as orbital space facilities, space propulsion
systems, space vehicles, satellites, or space stations of
any kind, and any related components.
TPP intended to be placed or used aboard any facility,
system, vehicle, satellite, or station, whether or not that
property returns to this state for subsequent use, storage,
or other consumption.
Fuel produced, sold, and used exclusively for space
flight and not adaptable for use in ordinary motor vehicles
The SUT rates in California differ by county and locality, and
range from 7.50 percent to 10.00 percent, depending on whether
optional taxes are levied. The current statewide SUT rate is
8.38 percent (weighted by sales). This includes:
A state rate of 6.50 percent-3.9375 percent for the
General Fund, 2.0625 percent for specified local purposes,
0.25 percent for schools and community college funding, and
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0.25 percent to pay off the deficit-financing bonds.
A weighted average local rate of 1.88 percent, including
0.75 percent for general purposes, 0.25 percent for county
transportation purposes, and the remaining 0.88 percent
from optional SUTs largely used for transportation.
Proposed Law: This bill would expand the current SUT exemption
for qualified property used in space flight to also include
equipment and materials used to construct, reconstruct, or
improve new or existing facilities designed to launch,
manufacture, fabricate, assemble, or proves equipment that
facilitates the renovation, rehabilitation, or reconstruction of
commercial space launch sites. The measure removes a restriction
in current law that conditions the exemption on the purchaser's
intention to launch it into space, and applies the exemption to
property used to construct commercial launch site facilities.
Current law's existing exemption applies to purchases of
property to be launched in space. This bill targets purchases of
property that improve the facilities at commercial space launch
sites. Specifically, the bill expands the exemption to include
all materials and equipment purchased for use in constructing or
improving facilities designed to:
Launch equipment that facilitates the renovation,
rehabilitation, or reconstruction of commercial space
launch sites.
Manufacture equipment that facilitates the renovation,
rehabilitation, or reconstruction of commercial space
launch sites.
Fabricate, assemble, or process equipment that
facilitates the renovation, rehabilitation, or
reconstruction of commercial space launch sites.
This could include, for example, materials and equipment
purchased for use in constructing a rocket hangar, or
constructing a satellite manufacturing plant or a space launch
facility, as long as those facilities facilitate a commercial
space launch site's renovation, rehabilitation, or
reconstruction.
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The bill contains a January 1, 2024 sunset and would require the
Legislative Analyst's Office to report to the Legislature
information pertaining to the effect of this exemption.
Related Legislation: Senator Knight also introduced SB 412 to
exempt purchases of manufacturing, research and development
machinery and equipment by specified aerospace product and parts
manufacturers.
Staff Comments: Contracts to make improvements to real property
that include the installation of such items as buildings, launch
pads, and fencing, are construction contracts. Generally, for
sales and use tax purposes, the law regards the contractor as
the consumer of materials (where the contractor pays the tax
when he or she buys the materials) and the retailer of equipment
and fixtures (where the contractor reports the tax on his or her
selling price). This bill enables contractors to purchase
materials, fixtures, and equipment without payment of tax in his
or her performance of a construction contract for facilities
designed as specified in the bill.
Also, this bill enables any other purchaser of qualifying
tangible personal property to purchase the property from
retailers without payment of sales tax reimbursement or use tax.
The BOE's Regulation 1667, Exemption Certificates, provides
sellers instructions related to making sales to persons claiming
a tax exemption. If this bill becomes law, contractors and other
purchasers of qualifying property must provide the seller with
written certification that the property will be used in an
exempt manner. This certification, if taken in good faith,
relieves the seller from tax liability. If the purchaser uses
the property in a manner not qualifying for the exemption, the
regulation specifies that the purchaser is liable for the tax.
As noted above, the current statewide average SUT rate is 8.38
percent. Construction cost data for a commercial launch facility
is not readily available. As an order of magnitude, however, if
such a project cost $500 million, this measure would reduce
state and local SUT revenues by $42 million.
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