BILL ANALYSIS Ó AB 199 Page A Date of Hearing: May 11, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 199 (Eggman) - As Introduced January 29, 2015 2/3 vote. Fiscal committee. Urgency. SUBJECT: Alternative energy: recycled feedstock. SUMMARY: Expands the sales and use tax (SUT) exclusion under the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) by revising the definition of a "project" to include tangible personal property (TPP) that primarily processes or uses "recycled feedstock." Specifically, this bill: 1)Modifies the definition of "project" to include TPP that primarily processes recycled feedstock that is intended to be reused in the production of another product or utilizes AB 199 Page B recycled feedstock in the production of another product or soil amendment. 2)Defines "recycled feedstock" as material that would otherwise be destined for disposal, having completed its intended end use and product lifecycle. 3)Provides that a "project" does not include TPP that processes or utilizes recycled feedstock in a manner that would constitute disposal as defined pursuant to Public Resources Code Section 40192. 4)Provides that this is an urgency statute necessary for the immediate preservation of the public peace, health or safety. EXISTING LAW: 1)Creates CAEATFA for the purpose of promoting the development and utilization of alternative energy sources and the development and commercialization of advanced transportation technologies. 2)Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, or are needed to develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs. 3)Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used for the "design, manufacture, production, or assembly" of either advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, AB 199 Page C as defined. 4)Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion. 5)Requires CAEATFA to provide 20-day notice to the Legislature once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals. 6)Sunsets the CAEATFA's expanded authority to promote the use of advanced manufacturing on July 1, 2016. 7)Imposes a sales tax on a retailer's gross receipts from the retail sale of TPP in this state, unless the sale is specifically exempt from taxation by statute. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption. FISCAL EFFECT: According to the Board of Equalization, "[e]xisting law limits the allowable [SUT] exclusion for all projects approved by CAEAFTA, including this bill's described projects, to $100 million each calendar year. Between November 2010 and February 2015, CAEATFA has approved tax exclusions of over $283 million, but only $75 million has actually been claimed." COMMENTS: 1)Author's Statement : The author has provided the following statement in support of this bill: California exports 20 million tons of recyclables annually, AB 199 Page D worth nearly $8 billion. With AB 199, the state would help incentivize the recycling sector to invest more in manufacturing. Keeping more of these valuable materials in-state would allow Californians to share in both the environmental and economic benefits of their recycling. 2)Arguments in Support : The Natural Resources Defense Council states that "California's commitment to recycling has diverted millions of tons of recyclable materials per year, cut greenhouse gases, and created thousands of jobs over the past two decades. However, most of what we continue to send to landfills is readily recyclable or compostable. AB 199 will help incentivize collecting, processing, and manufacturing these material into new products in the state. According to CalRecycle, for every ton of materials that gets recycled instead of being disposed, California's 5,300 recycling establishments will pay an additional $101 in salaries, produce $275 more in goods and services, and generate $135 more in sales. Additionally, this generates a multiplier effect that supports the creation of jobs and tax revenue." 3)CAEATFA Background : The California Alternative Energy Source Financing Authority was established in 1980 with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, cogeneration and geothermal. In 1994, the authority was renamed "CAEATFA" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources, and to develop clean distributed generation. The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. AB 199 Page E CAEATFA may provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects. In addition, with the passage of SB 71 (Padilla), Chapter 10, Statutes of 2010, CAEATFA is allowed to grant a SUT exemption to provide financial assistance for the purchase of equipment that is used for the design, manufacture, production, or assembly of "advanced transportation technologies" or "alternative source" products, components, or systems (SB 71 Program). Alternative source products include cogeneration technology, energy conservation, solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. Alternative sources also include advanced electric distributive generation technology and energy storage technology. The SB 71 Program will sunset on January 1, 2021. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012, again expanded the SUT exclusion program to include advanced manufacturing projects. 4)Benefits Analysis : As noted above, CAEATFA may provide a SUT exclusion for the purpose of promoting the creation of California-based manufacturing, California-based jobs, advanced manufacturing, the reduction of greenhouse gases, or the reduction in air and water pollution or energy consumption. Before a SUT exclusion can be awarded, CAEATFA is required to determine the eligibility of individual projects based on a number of factors relating to a reduction in greenhouse gases and the creation of manufacturing jobs. An important factor that CAEATFA is required to consider is the extent to which the anticipated benefit to the state from AB 199 Page F the project equals or exceeds the loss of sales and use tax 5)What Does this Bill Do ? This bill expands the types of projects that may qualify for the SUT exclusion to include TPP that is either: (a) primarily used to process recycled feedstock intended to be reused in the production of another product, or (b) primarily utilizes recycled feedstock in the production of another product or soil amendment. "Recycled feedstock" is defined as materials that would otherwise be destined for disposal, having completed its intended end use and product lifecycle. According to CalRecycle, between 6% (for multi-stream) and 81% (for mixed waste) of the incoming material at a Materials Recovery Facility (MRF) is usually sent to landfills for final disposal.<1> MRFs receive recyclables and sorts the materials by type or grade to meet the commodity specifications. The inability of the MRF to recycle a larger portion of the materials is due, in part, to a lack of equipment capable of sorting the various plastics, paper, metals, and glass. The expansion of qualifying projects is meant to incentives the purchase of machinery that is better able to sort recyclable material, thereby reducing the amount of recyclable material that ends up in landfills. Unfortunately, the term "processes" lacks clarity. Specifically, it is unclear if an exclusion from the SUT would be limited to equipment that can further refine the sorting of various recyclable materials. -------------------------- <1> "Multi-stream" refers to incoming recyclables that have usually been collected separately from each other; for example, a curbside program that separates paper from glass or plastic prior to pick-up is considered "multi-stream". "Single-stream" refers to all incoming recyclables that have been collected in one stream, such as in a residential blue bin program. Recyclables collected in a single-stream manner often have a higher level of contamination than materials received through a multi-stream process. (State of Recycling in California, CalRecycle, March 2015.) AB 199 Page G The second provision of this bill provides a SUT exclusion for TPP that primarily utilizes recycled feedstock in the production of another product or soil amendment. According to CalRecycle, there are approximately 160 MRFs throughout the state, which sort recyclable material. Once recoverable materials are collected and sorted or processed, they are delivered to recycling or manufacturing markets in California, domestically and internationally. However, according to CalRecycle, there is a minimal manufacturing infrastructure in California for recycled glass, paper, plastic, and tires. If all of the reported material from processing facilities for glass, paper, and plastics went to manufacturing facilities in California, the supply would exceed the manufacturing capacity by more than 300%. Therefore, the inclusion of TPP that primarily utilizes recycled feedstock is meant to increase the manufacturing capacity of recycled material. Unfortunately, the term "primarily" is undefined. Under the language of this bill, a glass manufacturer can potentially qualify for a SUT exclusion for the purchase of a furnace used to create glass bottles with raw material so long as the furnace also uses recycled glass. Within the state's partial SUT exemption, the term "primarily" means 50% or more; but without defining the term within this bill, the equipment used to manufacture products using recyclable feedstock can be incredibly broad. Finally, within the second provision, this bill also provides a SUT exclusion for TPP that primarily uses recycled feedstock to create soil amendment. The term "soil amendment," again, lacks clarity. According to the author's office, this term means "compost". As explained, the definitions used within this bill are incredibly broad. Therefore, the author may wish to provide definitions that better identify the equipment contemplated by this program. 6)Partial Sales and Use Tax Exemption : The rationale for providing a SUT exemption on business inputs is to reduce the imposition of a tax on a tax, otherwise known as "pyramiding". AB 199 Page H The SUT is paid when a business is considered to be the final consumer of tangible item. The tax paid on TPP is then incorporated into the cost of a consumer product, leading to double taxation. As noted by Joseph Henchman, "Ideally, a sales tax should be levied on all goods and services sold at retail, and to prevent distortions and hidden taxes, it should be levied only once on each good or service sold at retail." (Joseph Henchman, States Should Avoid Sales Taxes on Nonprofit Hospital Purchases, Tax Foundation, April 2008.) Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services that are provided by a single company instead of those that require multiple production steps. (Id.) The passage of AB 93 (Committee on Budget), Chapter 69, Statutes of 2013, and SB 90 (Galgiani), Chapter 70, Statutes of 2013, created California's first effort to grant a partial SUT exemption for taxpayers performing manufacturing or research and development in the state. There are a few differences between CAEATFA's SUT exclusion and the state's partial SUT exemption. The partial exemption rate is currently 4.1875%. The partial exemption provides that sales of the qualifying property sold to a qualified person be taxed at a rate of 3.3125% (7.50% current statewide tax rate - 4.1875% partial exemption) plus any applicable district taxes. Under CAEATFA, an approved project does not pay any SUT tax, including local and district taxes. Additionally, the state's SUT exemption is much broader and more readily available. So long as a business meets all requirements, a qualifying manufacturer can receive a partial SUT exemption. CAEATFA, however, is a more robust process, requiring the applicant to meet a set of criteria before the exclusion can apply. Furthermore, the programs appear to accomplish different goals. Both programs reduce the economic distortions related to taxing business inputs, but CAEATFA appears to also be concerned with encouraging projects that provide a greater return on investment for the state. As noted above, the anticipated project benefits, measured by the fiscal and AB 199 Page I environmental benefit to the state, must exceed the cost of forgone SUT. No such analysis is needed for the partial SUT exempt. 7)Double Referral : This bill was double-referred to the Assembly Committee on Natural Resources, which passed this bill on March 23, 2015, with a vote of 9-0. For additional discussion of this bill, please refer to the analysis prepared by the Assembly Committee on Natural Resources. 8)Related Legislation : AB 1269 (Dababneh) extends the authority of CAEATFA to grant financial assistance in the form of a SUT exclusion for projects that promote the use of advanced manufacturing until January 1, 2021. AB 1269 is currently pending hearing by the Assembly Appropriations Committee. 9)Prior Legislation : a) AB 1021 (Eggman), of the 2013-14 Legislative Session, was substantially similar to this bill. AB 1021 was held on Senate Appropriation Committee's Suspense File b) . c) SB 1128 (Padilla), Chapter 677, Statutes of 2012, expands CAEATFA's SUT exclusion program to include advanced manufacturing projects. d) SB 71 (Padilla), Chapter 10, Statutes of 2010, allows CAEATFA to grant a SUT exemption to provide financial assistance for the purchase of equipment that is used for the design, manufacture, production, or assembly of AB 199 Page J "advanced transportation technologies" or "alternative source" products, components, or systems. REGISTERED SUPPORT / OPPOSITION: Support Association of Compost Producers Association of Postconsumer Plastic Recyclers California Association of Sanitation Agencies California Compost Coalition California Electronic Asset Recovery California Manufacturing and Technology Association California Refuse Recycling Council CarbonLITE Industries Command Packaging CRM CR&R Environmental Services Don't Waste LA Coalition ECS Refining Glass Packaging Institute Global Plastics Institute of Scrap Recycling Industries Los Angeles Alliance for a New Economy AB 199 Page K Napa Recycling and Waste Services Natural Resources Defense Council PC Recycle Recology RePet RePlanet Republic Services Solid Waste Association of North America State of California, Treasurer StopWaste Strategic Materials Tri-City Economic Development Corporation Talco Plastics Verdeco Recycling Waste Management Opposition None on file AB 199 Page L Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916) 319-2098