BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                     AB 199


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 199  
          (Eggman) - As Introduced January 29, 2015


                                      SUSPENSE


          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 California Recycling Industries


          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












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          Institute of Scrap Recycling Industries 
          Los Angeles Alliance for a New Economy
          Napa Recycling and Waste Services
          Natural Resources Defense Council
          PC Recycle
          Potential Industries
          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












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          None on file




          Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)  
          319-2098