BILL ANALYSIS Ó
AB 199
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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
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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,
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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,
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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.
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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
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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.)
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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".
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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
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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
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"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
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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
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Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098