BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                      AB 88


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 88  
          (Gomez) - As Amended April 6, 2015


                                      SUSPENSE


          Majority vote.  Fiscal committee.  Tax levy.


          SUBJECT:  Sales and use taxes: exemption: energy or water  
          efficient home appliances.


          SUBJECT:  Sales and use taxes: exemption: energy or water  
          efficient home appliances.


          SUMMARY:  Establishes a sales and use tax (SUT) exemption for  
          any "energy or water efficient home appliance" purchased by a  
          "public utility" that is provided at no cost to a "low-income  
          participant" in a federal, state, or ratepayer-funded energy  
          efficiency program for use by that "low-income participant" in  
          the energy efficiency program.  Specifically, this bill:  











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          1)Provides that any amounts that would have been paid as sales  
            tax reimbursement or use tax by the "public utility" but for  
            the exemption must be used by the public utility to purchase  
            additional "energy or water efficient home appliances" to be  
            provided at no cost to "low-income participants" in the energy  
            efficiency program.  


          2)Defines an "energy or water efficient home appliance" as a  
            refrigerator, dishwasher, washer, dryer, or other appliance  
            that meets performance requirements under the ENERGY STAR  
            program, established pursuant to Section 6294a of Title 42 of  
            the United States Code.


          3)Defines a "public utility" as an entity defined in Public  
            Utilities Code (PUC) Section 216 or 224.3.  


          4)Defines a "low-income participant" as any person who is, or  
            who is residing in a home with a person who is:


             a)   A recipient of Medi-Cal, CalFresh, CalWORKs,  
               Supplemental Security Income, Special Supplemental  
               Nutrition Program for Women, Infants, and Children,  
               Low-Income Home Energy Assistance Program, State Utility  
               Assistance Supplement, or some other state or federal means  
               tested program; or, 


             b)   Able to certify that their gross income, not including  
               any amount of food assistance, is less than 200% of the  
               federal poverty guidelines. 


          5)Provides that, notwithstanding Revenue and Taxation Code  











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            Section 2230, the state shall not reimburse any local agency  
            for any SUT revenues lost as a result of this exemption.


          6)Takes immediate effect as a tax levy.


          EXISTING FEDERAL LAW establishes ENERGY STAR as a voluntary  
          program within the Department of Energy and the Environmental  
          Protection Agency to identify and promote energy-efficient  
          products and buildings in order to reduce energy consumption,  
          improve energy security, and reduce pollution.  (42 United  
          States Code Section 6294a.)



          EXISTING STATE LAW:  
          1)Imposes a sales tax on retailers for the privilege of selling  
            tangible personal property (TPP), absent a specific exemption.  
             The tax is based upon the retailer's gross receipts from TPP  
            sales in this state.  

          2)Imposes a complimentary use tax on the storage, use, or other  
            consumption of TPP purchased out-of-state and brought into  
            California.  The use tax is imposed on the purchaser, and  
            unless the purchaser pays the use tax to an out-of-state  
            retailer registered to collect California's use tax, the  
            purchaser remains liable for the tax.  The use tax is set at  
            the same rate as the state's sales tax and must generally be  
            remitted to the State Board of Equalization (BOE).

          3)Defines a "public utility" to include every common carrier,  
            toll bridge corporation, pipeline corporation, gas  
            corporation, electrical corporation, telephone corporation,  
            telegraph corporation, water corporation, sewer system  
            corporation, and heat corporation, where the service is  
            performed for, or the commodity is delivered to, the public or  
            any portion thereof.  (PUC Section 216.)












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          4)Defines a "local publicly owned electric utility" as a  
            municipality or municipal corporation operating as a "public  
            utility" furnishing electric service as provided in PUC  
            Section 10001, a municipal utility district furnishing  
            electric service formed pursuant to PUC Section 11501 et seq.,  
            a public utility district furnishing electric services formed  
            pursuant to the Public Utility District Act, an irrigation  
            district furnishing electric services formed pursuant to the  
            Irrigation District Law, or a joint powers authority that  
            includes one or more of these agencies and that owns  
            generation or transmission facilities, or furnishes electric  
            services over its own or its member's electric distribution  
            system.  (PUC Section 224.3.)

          FISCAL EFFECT:  The BOE estimates that this bill would reduce  
          state and local revenues by $12.8 million annually.<1>


          COMMENTS:  


          1)The author has provided the following statement in support of  
            this bill:


               AB 88 seeks to provide a sales and use tax exemption for  
               energy or water efficient appliances provided free of cost  
               to eligible low-income utility consumers. This bill helps  
               further California's environmental and energy efficiency  
               goals by reducing energy and water consumption, while  
               reducing costs for a greater number of low-income  
               Californians. 
               -------------------------


          <1> The BOE has provided the following qualifying remarks in  
          connection with this fiscal estimate:  "The revenue estimate is  
          based on expenditure data of the four major IOUs and two major  
          POUs.  At the time of this estimate, data was unavailable for  
          other public utilities' appliance expenditures that may be  
          exempted under this bill's provisions.  To that extent, this  
          estimate may be understated."  








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          2)Proponents of this bill note the following:


               A Board of Equalization (BOE) audit completed in July of  
               2014 discovered that there is no specific tax exemption for  
               an energy or water efficient appliance that is purchased by  
               a public utility and provided, at no cost, to a qualified  
               low-income customer participating in the energy efficiency  
               program.  The BOE has established that a sales tax, of  
               approximately $54 for a $600 refrigerator, must now be  
               levied on appliances distributed for free through these  
               local programs.  AB 88 would exempt the new tax when the  
               energy efficient appliance replacement programs target  
               low-income customers.  


               Appliance replacement programs already serve too few of  
               those who qualify and the programs do not have the funds to  
               come up with additional taxes that will now be required by  
               the BOE.  Meanwhile, reduction of greenhouse gasses and  
               water conservation are goals that all Californians wish to,  
               in fact need to, participate in.  


          3)This bill is opposed by the California State Association of  
            Counties, which notes: 


               While we appreciate the intent of this bill and the recent  
               amendments to provide greater specificity to the program,  
               CSAC opposes AB 88 as currently written because of the  
               negative impact to counties.  After the past thirty years  
               of changes to sales and use tax allocations, counties now  
               receive almost half of sales and use tax revenues.  About  
               two-thirds of that revenue is constitutionally dedicated to  
               providing local public safety services and federal and  
               state programs, including social services, incarceration,  











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               and rehabilitation. 


               Therefore, we respectfully request that the local portions  
               of sales and use tax be untouched by AB 88 and vital  
               dollars continue to flow to critical service needs.  We  
               have no concern with the state's portion being used for  
               this program in an effort to further statewide energy  
               conservation goals.  


          4)The BOE notes the following in its staff analysis of this  
            bill:


              a)   Bill should define "home appliance"  :  "Most recognize  
               common household appliances as refrigerators, dishwashers,  
               clothes washers, etc., however, the term can also mean any  
               instrument, apparatus, or device for a particular purpose  
               or use (see Dictionary.com).  Many utility companies make  
               no-cost energy improvements to qualified low-income homes  
               that include things like compact fluorescent lights,  
               in-ground pool pumps, attic insulation, and showerheads.   
               It appears that under the broader 'appliance' definition,  
               these items could be included within the exemption's scope,  
               since many of these items are qualified ENERGY STAR  
               products.  A definition should be added to eliminate any  
               ambiguity and avoid any unanticipated revenue loss."


              b)   The bill provides no lead time  :  "The proposed exemption  
               takes effect immediately, which provides the BOE with no  
               lead time to notify retailers.  In order for retailers to  
               properly claim a sales tax exemption under this bill,  
               retailers must accept in good faith an exemption  
               certificate from a utility company that certifies that the  
               utility company's purchase qualifies for the exemption.   
               The bill should provide adequate lead time to allow the BOE  
               to notify and educate retailers of their sales tax  











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               responsibilities associated with this new exemption."        
                


          5)Committee Staff Comments


              a)   What is a "tax expenditure"  ?  Existing law provides  
               various credits, deductions, exclusions, and exemptions for  
               particular taxpayer groups.  In the late 1960s, U.S.  
               Treasury officials began arguing that these features of the  
               tax law should be referred to as "expenditures" since they  
               are generally enacted to accomplish some governmental  
               purpose and there is a determinable cost associated with  
               each (in the form of foregone revenues). 

              b)   How is a tax expenditure different from a direct  
               expenditure  ?  As the Department of Finance notes in its  
               annual Tax Expenditure Report, there are several key  
               differences between tax expenditures and direct  
               expenditures.  First, tax expenditures are reviewed less  
               frequently than direct expenditures once they are put in  
               place.  While this affords taxpayers greater financial  
               predictability, it can also result in tax expenditures  
               remaining a part of the tax code without demonstrating any  
               public benefit.  Second, there is generally no control over  
               the amount of revenue losses associated with any given tax  
               expenditure.  Finally, it should also be noted that, once  
               enacted, it takes a two-thirds vote to rescind an existing  
               tax expenditure absent a sunset date.  This effectively  
               results in a "one-way ratchet" whereby tax expenditures can  
               be conferred by majority vote, but cannot be rescinded,  
               irrespective of their efficacy or cost, without a  
               supermajority vote.


              c)   The Energy Savings Assistance Program  :  The Energy  
               Savings Assistance Program (ESAP) provides no-cost  
               weatherization services to low-income households meeting  











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               specified income guidelines.  For example, the income  
               eligibility upper limit for a household of four is  
               currently $47,700.  Services provided include attic  
               insulation, weather-stripping, caulking, and door and  
               building envelope repairs to reduce air infiltration.   
               Qualified ESAP customers may also be eligible to receive  
               energy-efficient replacement appliances.  For example,  
               Pacific Gas & Electric (PG&E) notes that energy-saving  
               measures through ESAP can include the repair or replacement  
               of the customer's refrigerator.  In addition, furnace and  
               water heater repair or replacement may be available to  
               eligible customers if PG&E determines that existing natural  
               gas units are inoperable or unsafe.  The author notes that  
               ESAP helps to reduce energy and water consumption, while at  
               the same time reducing gas and electricity costs for  
               low-income customers.  In addition, the author states:


                 ESAP leads to the safe recycling of old inefficient  
                 appliances[,] which helps to reduce illegal dumping and  
                 ensures that hazardous components and materials including  
                 PCB-containing capacitors, CFC/HFC/HCFC refrigerants,  
                 polyurethane foam insulation, and recyclable materials  
                 such as ferrous and nonferrous metals, plastics, and  
                 glass are properly handled. 


               According to the California Public Utilities Commission,  
               preliminary 2014 ESAP expenditures for the four largest  
               investor-owned utilities amount to $230 million.  This  
               total reflects expenditures for a broad range of appliances  
               and devices, including clothes washers, refrigerators,  
               microwaves, central air conditioners, evaporative coolers,  
               and compact fluorescent lights, among other items.  It  
               should be noted that these expenditures also include exempt  
               installation costs.  


              d)   The ENERGY STAR program  :  This bill defines an eligible  











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               "energy or water efficient home appliance" as a  
               refrigerator, dishwasher, washer, dryer, or other appliance  
               that meets performance requirements under the ENERGY STAR  
               program.  


               The ENERGY STAR program, in turn, is a voluntary federal  
               program designed to identify and promote energy-efficient  
               products and buildings in order to reduce energy  
               consumption, improve energy security, and reduce pollution  
               through voluntary labeling of products and buildings that  
               meet the highest energy conservation standards.  ENERGY  
               STAR has grown to include products in more than 70  
               different categories, with more than 4.8 billion products  
               sold since 1992. 


               Transitioning to ENERGY STAR-certified appliances has many  
               advantages.  By way of example, there are an estimated 170  
               million refrigerators and refrigerator-freezers currently  
               in use in the United States.  More than 60 million  
               refrigerators are over 10 years old, costing consumers $4.7  
               billion per year in energy costs.  ENERGY STAR-certified  
               refrigerators, in turn, are roughly 9 to 10% more energy  
               efficient than models meeting the federal minimum energy  
               efficiency standard.  By properly recycling an old  
               refrigerator and replacing it with a new ENERGY  
               STAR-certified model, the average consumer could save  
               between $35 and $300 on energy costs over the lifetime of  
               the appliance.  Cumulatively, if all refrigerators sold in  
               the United States were ENERGY STAR-certified, the energy  
               cost savings would grow to more than $400 million each year  
               and eight billion pounds of annual greenhouse gas emissions  
               would be prevented.  This is equivalent to the emissions  
               from 750,000 vehicles.   


              e)   Everything's great until you get audited  :  The author  
               notes that, in the summer of 2014, a BOE audit determined  











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               that there is no specific exemption for an energy- or  
               water-efficient appliance purchased by a public utility and  
               provided at no cost to a qualified low-income customer.   
               The author notes that, without a statutory exemption, fewer  
               financial resources will be available to serve low-income  
               families.  To this end, the author states, "The goal of AB  
               88 is to make sure that the maximum number of families are  
               served in a federal, state, or ratepayer-funded energy  
               efficiency program."  


              f)   Absence of a sunset date  :  In its current form, this  
               bill's proposed tax expenditure lacks an automatic sunset  
               provision.  This Committee has a longstanding policy  
               favoring the inclusion of sunset dates to allow the  
               Legislature periodically to review the efficacy and cost of  
               such programs.  The author may wish to consider the  
               addition of appropriate sunset provisions.


              g)   Getting specific  :  This bill defines an "energy or water  
               efficient home appliance" as a refrigerator, dishwasher,  
               washer, dryer, or other appliance that meets performance  
               requirements under the ENERGY STAR program (emphasis  
               added).  As the BOE notes in its staff analysis, the  
               generic term "appliance" could be read to include a  
               sweeping array of devices and provides little  
               administrative guidance.  To ease administration of this  
               exemption and prevent potential disputes, the author may  
               wish to provide a detailed but limited enumeration of  
               appliances qualifying for the exemption.  


                The very term "energy or water efficient home appliance"  
               raises another issue.  The term would seem to suggest that  
               this bill's exemption is designed to achieve both energy  
               and water conservation goals.  While some ENERGY STAR  
               appliances, such as front-loading washing machines, may  
               achieve ancillary water efficiency goals, the ENERGY STAR  











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               program is concerned first and foremost with the  
               conservation of energy.  The United States Environmental  
               Protection Agency does administer a similar program,  
               "WaterSense", for water conservation purposes.  While  
               beyond the purview of this Committee's expertise, the  
               author may wish to consider a reference to this or a  
               similar program in the bill's definition of qualifying  
               appliances.   


                Finally, this bill includes a rather detailed definition of  
               a "low-income participant".  Committee staff questions  
               whether it might be administratively easier to simply  
               define such individuals by reference to the ESAP program  
               itself.  


              h)   Related legislation  :  AB 816 (Hall), of the 2013-14  
               Legislative Session, would have provided a SUT exemption  
               for energy- or water-efficient home appliances purchased by  
               a public utility and provided at no cost to a participant  
               in a federal, state, or ratepayer-funded energy efficiency  
               program.  AB 816 originally related to alcoholic beverages,  
               was gutted and amended with the SUT exemption, and was  
               withdrawn from the Senate Government Organization Committee  
               to Senate Rules.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Appliance Recycling Centers of America













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          BOE Member Jerome E. Horton


          California Apartment Association


          California Building Industry Association


          California Contract Cities Association


          California League of Conservation Voters


          Californians Against Waste


          California Retailers Association


          California Rural Legal Assistance Foundation


          Center on Race, Poverty & the Environment


          City of Oakland


          Coalition for Humane Immigrant Rights of Los Angeles


          La Cooperativa Campesina de California


          Los Angeles Area Chamber of Commerce













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          Los Angeles Mayor Eric Garcetti


          Los Angeles County Supervisor Michael D. Antonovich


          Sierra Club California


          State Board of Equalization


          Western Center on Law and Poverty




          Opposition


          California State Association of Counties


          California Tax Reform Association




          Analysis Prepared by:M. David  Ruff / REV. & TAX. / (916)  
          319-2098




















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