BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
SB 412 (Knight) - Sales and Use Tax: Exemption: Aerospace
Products Manufacturing
Amended: May 14, 2013 Policy Vote: G&F 7-0
Urgency: No Mandate: No
Hearing Date: May 20, 2013 Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 412 would establish a sales and use tax (SUT)
exemption for equipment used to manufacturing aerospace
products.
Fiscal Impact: The Board of Equalization (BOE) estimates that
this bill would result in a revenue loss of $12.5 million in
2013-14, $26 million in 2014-15, and $28 million in 2015-16.
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 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,
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almost the entire decline occurred between 1993 and 2004.
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
(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 SUT exemption on their
purchases of specified manufacturing equipment. Also, the law
provided manufacturers income and corporation tax credits (MIC)
of six 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
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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: Beginning January 1, 2014 and before January 1,
2019, this bill would provide a 3.9375 percent state sales and
use tax exemption for a "qualified person's" purchases of:
Tangible personal property to be used 50 percent or more
in aerospace products and parts manufacturing
Tangible personal property purchased for use by a
contractor, as specified, 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 process or as a facility for use in
connection with the manufacturing process.
This bill defines "qualified person" as either:
A person who is primarily engaged in aerospace product
and part manufacturing described in the 2012 edition of
North American Industry Classification System (NAICS), Code
3364, or
A qualified person's affiliate, if the affiliate is a
member of that person's unitary group, as specified.
The bill defines "manufacturing," "primarily," and "process."
The bill also specifies which tangible personal property the
proposed exemption includes or excludes.
The proposed partial exemption excludes:
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Consumables with less than a one year useful life,
Furniture, inventory, equipment used in the extraction
process or equipment used to store finished products that
have completed the manufacturing process, and
Tangible personal property primarily used in
administration, general management, or marketing.
The bill would require the Legislative Analyst's Office to
report on the exemption's effect on aerospace and related
industries' employment, as specified.
Related Legislation: Senator Knight also introduced SB 19 to
exempt from sales and use tax equipment and materials purchased
for use in the construction or improvement of specified
facilities at commercial space launch sites. Other bills
introduced this year related to exempting from sales and use tax
manufacturing equipment purchases include:
SB 235 (Wyland) provides manufacturers and their
affiliates 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: Unlike the other partial SUT exemptions that are
current law, this bill proposes a new 3.9375 percent exemption
rate. This requires a SUT return revision with a new, separate
return computation. If enacted, some retailers may be required
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to segregate the exempt 3.9375 percent sales, the exempt 5.50
percent sales, fully exempted sales (e.g., sale to the US
government or interstate commerce sale), and fully taxable
sales. This adds a new level of complexity, and potentially
increases tax reporting errors. Consequently, BOE's tax
administrative functions and retailers' reporting obligations
become more complex.