BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 376 HEARING: 4/24/13
AUTHOR: Correa FISCAL: Yes
VERSION: 4/16/13 TAX LEVY: Yes
CONSULTANT: Miller
SALES & USE TAXES: PERSONAL AND CORPORATE INCOME TAX:
MANUFACTURERS' CREDIT & EXEMPTION.
Provides manufacturers, software publishers and their
affiliates a 6.5% sales and use tax exemption.
Background and Existing Law
Sales Tax
Existing law does not currently provide special tax
treatment to manufacturers or software producers for
purchases of equipment and other supplies. Business that
manufacture, perform research, produce software, that
purchases equipment and supplies pay sales and use tax on
their purchases as anyone else in California.
The state sales and use tax rate is 7.50% as detailed
below. Cities and Counties may increase the sales and use
tax rate up to 2% for either specific or general purposes
with a vote of the people.
-------------------------------------------------------------
| | | |
| Rate | Jurisdiction | Purpose/Authority |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|3.9375%|State (General |State general purposes |
| |Fund) | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|1.0625%|Local Revenue Fund |Realignment of local public |
| |2011 |safety services |
| | | |
SB 376 -- 4/16/13 -- Page 2
| | | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.25% |State (Fiscal |Repayment of the Economic |
| |Recovery Fund) |Recovery Bonds |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.25% |State (Education |Schools and community college |
| |Protection Account) |funding |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local |Local governments to fund |
| |Revenue Fund) |health and welfare programs |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local Public |Local governments to fund |
| |Safety Fund) |public safety services |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 1.00% |Local (City/County) |City and county general |
| | |operations. Dedicated to county |
| | |transportation purposes |
| |0.75% City and | |
| |County | |
| | | |
| |0.25% County | |
|-------+--------------------+--------------------------------|
| | | |
| 7.50% |Total Statewide | |
| |Rate | |
| | | |
-------------------------------------------------------------
Many items are fully exempted from the sales and use tax in
this state (prescription drugs, food, poultry litter) but
only a handful are partially exempted from the sales tax at
the rate of 5.5%; specifically: Farm equipment and
machinery; Diesel fuel used for farming and food
processing; Teleproduction and postproduction equipment;
Timber harvesting equipment and machinery; and Racehorse
breeding stock.
SB 376 -- 4/16/13 -- Page 3
Corporate and Income Tax
Existing state and federal laws provide various tax credits
designed to provide tax relief for taxpayers who incur
certain expenses (e.g., child adoption) or to influence
behavior, including business practices and decisions (e.g.,
research credits or economic development area hiring
credits). These credits generally are designed to provide
incentives for taxpayers to perform various actions or
activities that they may not otherwise undertake.
For a ten-year period ending December 31, 2003, California
law provided a partial (General Fund only) sales and use
tax exemption for purchases of equipment and machinery by
new manufacturers, and income and corporation tax credits
for existing manufacturers' investments (MIC) in equipment
(SB 671, Alquist, 1993). The bill provided an exemption to
the state portion of the sales and use tax for sales and
purchases of qualifying property, and the income tax credit
equal to six percent of the amount paid for qualified
property placed in service in California. Qualified
property was depreciable equipment used primarily for
manufacturing, refining, processing, fabricating or
recycling; for research and development; for maintenance,
repair, measurement or testing of qualified property; and
for pollution control meeting state or federal standards.
The MIC had a conditional sunset date which required that
the provisions sunset in any year following a year when
manufacturing employment (as determined by the Employment
Development Department) did not manufacturing employment by
more than 100,000. On January 1, 2003, manufacturing
employment, less aerospace, did not exceed the 1994
employment number by more than 100,000 (it was less than
the 1994 number by over 10,000), and so the MIC and partial
sales tax exemption sunset at the end of 2003.
Since then, over 19 bills have been introduced to
reinstate, expand, or modify the exemption and/or MIC, but
all failed to pass.
Proposed Law
Sales Tax Exemption
SB 376 -- 4/16/13 -- Page 4
General
Senate Bill 376 allows a 6.5% sales and use tax exemption
for "qualified person's" purchases of:
Tangible personal property to be used 50% or more in
manufacturing, processing, refining, fabricating, or
recycling of property (i.e., machinery, equipment, parts,
belts, shafts, computers, software, pollution control
equipment, buildings and foundations), as specified.
Tangible personal property to be used 50% or more in
research and development.
Tangible personal property to be used 50% or more in
maintaining, repairing, measuring, or testing any
qualifying equipment.
Tangible personal property purchased for use by a
contractor, as specified, for use in the performance of a
qualified person's construction contract. The qualified
person must use the property, however, as an integral
part of any manufacturing, processing, refining,
fabricating, or recycling process or as a research or
storage facility in connection with the manufacturing
process.
SB 376 excludes from the exemption the 1% Bradley-Burns
Uniform Local Sales and Use Tax Law or the Transactions and
Use Tax Law thus making it a partial sales and use tax
exemption of 6.5%
Corporate and Personal Income Tax
SB 376 allows a tax credit equal to 6.5% of the sale price
on transactions. The credit would be reported in three
equal amounts over the three taxable years beginning with
the first taxable year beginning on or after January 1,
2017.
Qualified tangible personal property means property
purchased for use by a qualified person to be used
primarily for the following:
SB 376 -- 4/16/13 -- Page 5
Any stage of manufacturing, processing, refining,
fabricating, or recycling of property; Research and
development; Maintenance, repair, measurement, or testing;
or Performance of a construction contract by a contractor
for property to be used 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 these processes.
Qualified person
SB 376 defines "qualified person" as either:
o A trade or business that is primarily engaged in
manufacturing activities, as described in North
American Industry Classification System (NAICS) codes
3111 to 3399, inclusive, and software publishing
activities as described in code 5112, of the 2012
edition of or
o A qualified person's affiliate, if the affiliate is
a member of that person's unitary group, as specified.
NAICS Codes 3111 to 3399 include all establishments
primarily engaged in manufacturing activities. This
includes manufacturers in the aerospace sector, textiles,
pharmaceuticals, printing, food, and more.
NAICS Code 5112 includes establishments primarily engaged
in computer software publishing or publishing and
reproduction. Software publishing establishments carry out
the functions necessary for producing and distributing
computer software. This includes activities such as
design, documentation, installation, and support services
to software purchasers. The software publishing industry
produces and distributes information by CD-ROMs, and
downloadable products through the sale of new computers
with preloaded software, or through the Internet.
Other definitions
SB 376 defines "fabricating," "manufacturing," "primarily,"
"process," "processing," "refining," "research and
development," and "useful life." The bill also specifies
the tangible personal property included or excluded from
the proposed partial exemption.
SB 376 -- 4/16/13 -- Page 6
The proposed partial exemption excludes:
o Any tangible personal property primarily used in
administration, general management, or marketing,
o Consumables with less than a one year useful life,
except fuels, and
o Furniture, inventory, equipment used in the
extraction process or equipment used to store finished
products that have completed the manufacturing
process.
State Revenue Impact
Sales Tax Provisions
According to the BOE , SB 376 will result in a $660 million
loss in 2016-17 and a $1.39 billion ongoing loss in
2017-18. These estimates assume that the author will amend
the bill to ensure that the taxpayers are primarily engaged
in these businesses and delete the "affiliate" provisions.
Corporate and Income Tax Provisions
According to the FTB, SB 376 will result in a $200 million
loss in 2016-17; $550 million loss in 2017-18 and an
ongoing loss of $700 million.
SB 376 -- 4/16/13 -- Page 7
Total impact (in millions):
-------------------------------------------------------------------
| | 2016-17 | 2017-18 | 2018-19 | 2019-20 |
|---------------+------------+------------+------------+------------|
|Income/Corporat| -$200 | -$550 | -$700 | -$700 |
| e | | | | |
|---------------+------------+------------+------------+------------|
| Sales | -$660 | -1.390 | -$1.390 | -$1.390 |
|---------------+------------+------------+------------+------------|
| TOTAL | -$800 | -$1.940 | -$2.090 |-$2.090 |
| | | | | |
-------------------------------------------------------------------
Comments
1. Purpose of the bill . According to the author, "The
high cost of doing business in California has already seen
many manufacturers expand or shift operations to other
states. Over 11,400 manufacturing jobs were lost in 2012
alone. Most states provide both a sales tax exemption and
investment tax credits to encourage manufacturing
investment (California is one of only three states in the
nation that do not). Removing barriers to investments to
promote new machinery and equipment purchases in California
will only serve to foster productivity gains, making
manufacturers more competitive and allow them to keep
employees and grow the middle class in California. SB 376
would reinstate the needed and welcomed tax exemption for
an industry that has disproportionately been impacted by
significant business and job losses. Most states recognize
that taxing the input as well as the final manufactured
product is double taxation and discourages investment. SB
376 would realign California tax policy with the rest of
the nation."
2. Does it work ? Investment credits and sales and use tax
exemptions are expensive, and don't always make a
difference:
Productivity or Jobs-If the goal of this bill is to
increase productivity in the state, it may actually
reduce employment since the goal of increased
production is to do more with fewer people.
SB 376 -- 4/16/13 -- Page 8
Inequitable Taxation-This sales and use tax
exemption gives a tax advantage to manufacturing over
other business activities, as well as providing an
advantage to capital investment over labor.
Relocation not Creation-This credit results in few
new jobs, but instead pits states against each other
in competing for jobs.
Inefficient Development Policy-Tax incentives have
a negligible impact on economic growth, and any job
creation that does occur does so at a substantial cost
per job.
Ineffective Development Policy-Taxes are a very
small percentage of overall business costs and thus
have little effect on business decisions. Labor,
transportation, land, and other factors typically
constitute much more significant proportions of total
costs than do taxes. Therefore, according to those
who hold this view, tinkering with this particular
cost is unlikely to result in a large shift or
expansion of business compared to the adverse fiscal
effects that such measures can have on the state.
3. Zero sum game . All economists argue that a sales tax
exemption for manufacturing are superior to tax credits
because it benefits all companies that purchase qualified
equipment, regardless of whether the firm is profitable.
Plus, when manufacturing is exempt, only the outputs are
taxed, not the inputs. Tax credits provide a
dollar-for-dollar reduction in tax, which is based on a
firm's net income, so only firms that generate profits may
make use of tax credits. The Committee may wish to
consider deleting the corporate and personal income tax
credit as the sales tax exemption is much more efficient.
While a sales and use tax exemption makes more economic
sense, it would be one of the largest tax expenditures in
the state's budget. The Committee may wish to consider
this sales and use tax exemption instead of other programs
that have not been as successful or as academically sound
in this state. For example, would a sales tax exemption
make more sense than the hiring credit in the enterprise
SB 376 -- 4/16/13 -- Page 9
zone program or research and development credits?
4. Earn your credit . This bill grants an automatic
exemption, but should the exemption depend on meeting
performance measurers and a sunset? The committee may wish
to consider the following amendment to measure:
1. Increased employment for manufacturing, research
and development, and associated industries.
2. Siting for new and expanded manufacturing and
research and development facilities in this state.
3. Capital investment in manufacturing equipment and
all other tangible personal property, the sale or use
of which is qualified for exemption under this act.
The Committee may also wish to consider:
4. A sunset provision.
5. A minimum "net new jobs" requirement to qualify for
the credit.
5. Say what you mean . SB 376 lacks clear definitions. The
Committee may wish to consider the following amendments:
General
1. The definition should be qualified by referring to
taxpayers "primarily" engaged in the NAICS businesses
to avoid increased revenue losses.
2. The bill should delete the reference to
"affiliates." As proposed, the law does not require
that the affiliates be engaged in manufacturing or
software publishing activities. Instead, their
purchases of qualifying tangible personal property
need only be for use in a manner described in the
bill. For example, an affiliate of a television
manufacturer may be primarily engaged in the activity
of recycling. All the affiliate's equipment purchases
qualify for bill's exemption regardless of whether
the manufacturer or software publisher operates
primarily outside this state. The original
manufacturing exemption did not have this provision.
Potentially, this new provision adds a new level of
complexity for tax administration purposes, and
results in additional unknown sales and use tax
revenue losses.
Sales and Use Tax
1. The bill should limit the term "property" to
tangible personal property otherwise taxpayers could
assert that the bill includes intangible property
SB 376 -- 4/16/13 -- Page 10
creation or the provision of services and utilities.
To avoid any unintended consequence, we recommend the
term "property" be replaced with "tangible personal
property."
Corporate & Personal Income Tax
If the Committee does not amend the bill to exclude the
credit in addition the exemption, there are a number of
necessary amendments:
1. The bill uses sales tax terms for a net tax credit.
For example, "person," and "qualified person." These
terms need to be amended consistent with the correct
taxes.
2. Many terms and phrases that are undefined, i.e.,
"recycling," "recycling process," "recycling of
property," "recycling activity," "integral part,"
"standards established by this state or any local or
regional governmental agency within this state," "any
stage," and "placed in service." The absence of
definitions to clarify these terms and phrases could
lead to disputes with taxpayers and would
significantly complicate the administration of this
credit.
3. This bill would allow a tax benefit generated
beginning in January 1, 2017, for an expense or cost
of purchasing the qualified tangible personal property
beginning as early as January 1, 2014. It is unclear
how the taxpayer or the FTB would document eligibility
for the credit because of the delay between the credit
generated and the taxable year the credit would be
available to reduce tax.
4. Subdivision (d) of section 23649.1 needs to be
amended where the term "net tax" appears, as it should
be "tax" to correspond to the definition in the CTL.
Subparagraph (B) of paragraph (6) of subdivision (c)
of section 17053.93 needs to be amended to replace the
corporation language related to affiliated entities
with references to pass-through entities.
Support and Opposition (4/18/13)
Support : Solano Economic Development Corporation;
Acclamation Insurance Management Services; Baxter
Healthcare Corporation; Bayer HealthCare, LLC; California
Business Properties Association; California Cement
SB 376 -- 4/16/13 -- Page 11
Manufacturers Environmental Coalition; California Chamber
of Commerce; Chamber of Commerce Alliance, Ventura and
Santa Barbara Counties; California Chapter of American
Fence Association; California Concrete Contractors
Association; California Fence Contractors' Association;
California Healthcare Institute; California League of Food
Processors; California Manufacturers & Technology
Association; California Taxpayers Association; Caterpillar;
Chemical Industry Council of California; Consumer Specialty
Products Association; The Dow Chemical Company; Engineering
Contractors' Association; Flasher Barricade Association;
General Mills; Intel Corporation; Inline Translation
Services, Inc.; International Paper Company; Kimberly-Clark
Corporation; Los Angeles County Economic Development
Corporation; Marin Builders Association; National Aerosol
Association; National Federation of Independent Business -
California; Northrup Grumman Corporation; Novartis
Pharmaceuticals Corporation; Owens-Illinois, Inc.; Paulson
Manufacturing Corporation; Praxair, Inc.; Procter & Gamble
Company; Searles Valley Minerals; Silicon Valley Leadership
Group; Simi Valley Chamber of Commerce; Solano Economic
Development Corporation; Solar Turbines Incorporated; SPI,
The Plastics Industry Trade Association; TechAmerica;
Western Plastics Association
Opposition : California Tax Reform Association; California
Teacher's Association; Service Employees International
Union.