BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 88 |Hearing |7/1/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Gomez |Tax Levy: |Yes | |----------+---------------------------------+-----------+---------| |Version: |6/30/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- SALES AND USE TAXES: EXEMPTION: ENERGY OR WATER EFFICIENT HOME APPLIANCES Provides sales and use tax exemption for the sale of energy or water efficient home appliances, purchased by a public utility that is provided at no cost to a low income participant in an energy efficiency program. Background and Existing Law State law imposes a sales and use tax on the sale, storage, or use of tangible personal property unless exempted by state law. Generally, nonprofits, public agencies, and charities are subject to sales and use tax, unless otherwise exempted. Cities and Counties may increase the sales and use tax rate up to 2% as a transactions and use tax for either specific or general purposes with a vote of the people. Proposed Law Assembly Bill 88 provides sales and use tax exemption for the sale of energy or water efficient home appliances, purchased by a public utility that is provided at no cost to a low income participant in an energy efficiency program. The bill specifies that any savings from the exemption must be used by the public utility to purchase additional energy or water efficient home AB 88 (Gomez) 6/30/15 Page 2 of ? appliances. AB 88 applies to federal, state, or ratepayer-funded energy or water efficiency programs. The bill defines "energy or water efficient home appliance" as a refrigerator or clothes washer that meets performance requirements under the ENERGY STAR program. The bill defines a low-income participant as a person who is a participant in the California Public Utilities Commission's Energy Savings Assistance Program (ESAP), or a similar energy or water efficiency program, provided by a public utility with income guidelines that do not exceed the income guidelines for ESAP participants. AB 88 becomes operative on the first day of the first calendar quarter commencing more than 90 days after the effective date of this act and shall remain in effect only until January 1, 2021. State Revenue Impact The Board of Equalization (BOE) estimates an annual loss of $4.5 million. This estimate only takes into account refrigerator and clothes washer expenditures for four large investor-owned utilities, and two large publicly-owned utilities. In California, there are 6 investor-owned utilities, and 46 publicly-owned utilities. Comments 1. Purpose of the bill. According to the author, "AB 88 creates a tax exemption for Energy Star clothes washers and refrigerators that are purchased through the Energy Savings Assistance Program for low income utility customers. Maximizing rate payer funds to benefit rate payers participating in ESAP is another effective tool to helping California achieve energy efficiency and water reduction goals. While the bill is a tax levy, it has a delayed effective date to provide the Board of Equalization a timeline for notifying businesses that would be retailing the appliances. To provide appropriate review of the legislation, AB 88 has a five year sunset to review its effectiveness." 2. Legal woes. The sponsor of AB 88, Appliance Recycling AB 88 (Gomez) 6/30/15 Page 3 of ? Centers of America (ARCA), supplies and recycles ENERGY STAR appliances for low income individuals in the Los Angeles area through the Los Angeles Department of Water & Power's (LADWP), and the Southern California Gas Company's low income programs. ARCA bills LADWP and Southern California Gas Company after delivering the new appliance, and recycling the old appliance. Since 2006, ARCA has provided 140,533 refrigerators and clothes washers in the Los Angeles area. ARCA failed to assess, collect, or remit sales and use tax to BOE for the sale of ENERGY STAR appliances to LADWP and Southern California Gas Company, and underwent a BOE managed audit as a result. The audit covered the period from January 1, 2011 through September 30, 2014, and was expected to be completed by March 31, 2015. ARCA estimated that the audit will likely result in a Notice of Determination from BOE of an assessment of at least $4.0 million. In a press release dated February 11, 2014, ARCA stated the assessment is subject to protest and appeal, would not need to be funded until the matter has been fully resolved. The press release also stated the company was pursuing Legislation to help resolve the matter. In March of this year, a federal securities class action was filed against ARCA. The complaint claims ARCA made false and/or misleading statements in their financial statements concerning sales tax related to its appliance replacement program, among other allegations. Specifically, the complaint states ARCA knew or recklessly disregarded that material facts were being misrepresented or omitted in their financial statements concerning sales tax. To ensure that legal disputes are determined using the law in place at the time the sales and use tax should have been collected and remitted, the Committee may wish to consider amending the bill to include "no inference" language so that any pending, or future litigation, does not consider the bill's exemption. 3. Effect of exemption. AB 88's exemption aids low income individuals and families by providing low or no cost refrigerators and washing machines, but reduces revenues for cities, counties, and the state, which means less funds for programs that may also benefit low income individuals and families. For example, if the City of Blue purchases $100,000 in refrigerators in neighboring City of Green, the City of Blue will save $7,500 in sales and use tax, allowing the City of Blue AB 88 (Gomez) 6/30/15 Page 4 of ? to purchase additional refrigerators. The City of Green, where the refrigerators were sold, will lose approximately $2,063. The county City of Green is in will lose $1,000, and the State General Fund will lose $4,438. In effect, the State, city, and county governments would subsidize the purchase of tax-free refrigerators. 4. Related legislation. AB 816 (Hall), of the 2013-14 Legislative Session, would have provided a sales and use tax 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 sales and use tax exemption, and was withdrawn from the Senate Government Organization Committee to Senate Rules. Assembly Actions Assembly Revenue and Taxation 9-0 Assembly Appropriations 17-0 Assembly Floor 78-0 Support and Opposition (7/2/15) Support : Appliance Recycling Centers of America (ARCA); Asian Pacific Environmental Network; California Apartment Association; California Board of Equalization Chairman, Jerome Horton; California Building Industry Association; California Contract Cities Association; California League of Conservation Voters; California Retailers Association; California Rural Legal Assistance Foundation; Californians Against Waste; Center for Employment Training; Center on Race Poverty and the Environment; Central Basin Municipal Water District; City of Lancaster; City of Long Beach; City of Oakland; Coalition of California Welfare Rights Organization; Coalition for Humane Immigrant Rights of Los Angeles; Community Water Center; Employers Training Resource; Independent Cities Association; La Cooperativa Campesina de California; Los Angeles Chamber of Commerce; Los Angeles County Supervisor, Don Knabe; Los Angeles County Supervisor, Michael Antonovich; Los Angeles Mayor Eric Garcetti; AB 88 (Gomez) 6/30/15 Page 5 of ? Proteus Inc.; San Diego County Water Authority ; Sierra Club California; State Board of Equalization; Western Center on Law and Poverty. Opposition : California State Association of Counties; League of California Cities. -- END --