BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 376 (Correa) - Sales and Use Tax: Manufacturers' Exemption
Amended: April 30, 2013 Policy Vote: G&F 7-0
Urgency: No Mandate: No
Hearing Date: May 23, 2013 Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: SB 376 would establish a sales and use tax (SUT)
exemption for qualified businesses engaged in manufacturing,
research and development, and construction for purchases of
qualified tangible personal property from January 1, 2017
through December 31, 2022.
Fiscal Impact: The Board of Equalization (BOE) estimates that
this bill would result in a revenue loss of $1.3 billion
annually (General Fund and special fund). Additionally, BOE
would incur administration costs, likely in the range of $50,000
to $250,000 (General Fund), to reprogram for the partial
exemption, revise and process returns, notify retailers, audit
claimed exemptions, and answer inquiries from taxpayers and the
general public.
Background: 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.
Currently, most sales and use tax exemptions apply to the total
applicable SUT. However, current law contains five partial
exemptions, currently at a 5.50 percent rate:
(1) Farm equipment and machinery,
(2) Diesel fuel used for farming and food processing,
(3) Teleproduction and postproduction equipment,
(4) Timber harvesting equipment and machinery, and
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(5) Racehorse breeding stock.
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
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.
For a ten-year period ending December 31, 2003, the law provided
new manufacturers a state General Fund sales and use tax
exemption on their purchases of specified manufacturing
equipment. Also, the law provided manufacturers income and
corporation tax credits (MIC) of 6 percent for similar equipment
placed in service in California. Similar to the exemption
proposed in this bill, the partial exemption and credit related
to equipment used primarily for manufacturing, refining,
processing, fabricating or recycling. New manufacturers could
claim the partial exemption or the MIC. However, existing
manufacturers could only claim the MIC.
This partial exemption and MIC contained a conditional sunset
date. The law required these provisions to sunset when
nonaerospace manufacturing employment failed to exceed January
1, 1994 manufacturing employment by more than 100,000. On
January 1, 2003, the employment figures fell below the 1994
number by over 10,000. The partial exemption and MIC therefore
sunset at the end of 2003. Since then,19 bills have been
introduced to reinstate, expand, or modify the SUT exemption
and/or MIC, but all failed to pass.
Proposed Law: From January 1, 2017 through December 31, 2022
this bill provides a 6.25 percent SUT exemption for a "qualified
person's" purchases of:
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Tangible personal property to be used 50 percent 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 percent or more
in research and development (R&D).
Tangible personal property to be used 50 percent 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.
This bill defines "qualified person" as a trade or business that
is primarily engaged in manufacturing activities, as described
in the 2012 edition of the North American Industry
Classification System (NAICS) codes 3111 to 3399, inclusive, and
software publishing activities as described in code 5112.
The bill 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.
The proposed partial exemption excludes:
Any tangible personal property primarily used in
administration, general management, or marketing,
Consumables with less than a one year useful life, and
Furniture, inventory, equipment used in the extraction
process or equipment used to store finished products that
have completed the manufacturing process.
The bill excludes from the exemption any city, county, or
district tax levied pursuant to the Bradley-Burns Uniform Local
Sales and Use Tax Law or the Transactions and Use Tax Law. The
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proposed exemption includes the remaining state and local sales
and use tax components.
The bill also requires the Legislative Analyst's Office (LAO) to
conduct a study by January 1, 2019, using BOE information, to
measure the effects of the proposed exemption, as specified.
Related Legislation: Similar bills introduced this year include
the following:
SB 235 (Wyland) provides manufacturers and their
affiliates a 3.9375 percent exemption for their qualifying
tangible personal property purchases.
SB 412 (Knight) provides aerospace product and part
manufacturers a 3.9375 percent exemption for their
qualifying tangible personal property purchases.
AB 486 (Mullin) provides manufacturers, software
producers, various researchers and developers, and their
affiliates, a 5.25 percent exemption for their qualifying
tangible personal property purchases.
AB 653 (V. Perez) provides manufacturers, software
publishers, biotechnology research entities, and renewable
power generator facilities, and their affiliates a state
and local exemption for their qualifying tangible personal
property purchases.
AB 1326 (Gorell) provides unmanned aerial vehicle
manufacturers a state and local exemption for their
qualifying tangible personal property purchases.
Staff Comments: BOE's revenue estimate for this measure uses as
its starting point (1) California manufacturing-sector capital
expenditures data (machines, equipment and buildings) published
by the U.S. Census Bureau, and (2) the estimated California
share of national U.S capital expenditures data (machines and
equipment, buildings) for software publishers, also produced by
the Census Bureau. The most recent data available is for
calendar year 2011. BOE then grew those figures to account for
growth out to 2016-17 by assuming California's projected growth
will match that of the nation before applying the SUT rate to
determine the estimated revenue loss.
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Staff notes that the BOE's estimate of the revenue loss from
this bill is overstated since it does not reflect
manufacturing-related SUT exclusions authorized by the
California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA). Current law contains a specific
SUT exclusion for tangible personal property purchased for
certain manufacturing projects approved by CAEATFA through July
1, 2016. The Census Bureau data utilized by BOE presumably has
CAEATFA-related spending in its totals, and BOE reports that it
did not have the necessary information to make the corresponding
downward adjustment to its estimate of revenue loss.
Additionally, staff notes that to the extent that this measure
results in economic activity beyond what would have happened on
the natural, or the growth in California manufacturing-related
equipment trails that of the nation in the coming years, the
revenue loss from this measure would be lower than BOE's
estimate.