BILL ANALYSIS Ó
AB 199
Page A
ASSEMBLY THIRD READING
AB
199 (Eggman)
As Amended August 25, 2015
2/3 vote. Urgency
------------------------------------------------------------------
|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Natural |9-0 |Williams, Dahle, | |
|Resources | | | |
| | | | |
| | |Cristina Garcia, | |
| | |Hadley, Harper, Mark | |
| | |Stone, McCarty, | |
| | |Rendon, Wood | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Revenue & |9-0 |Ting, Brough, | |
|Taxation | |Dababneh, Gipson, | |
| | |Roger Hernández, | |
| | |Mullin, Patterson, | |
| | |Quirk, Wagner | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |17-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Eggman, | |
AB 199
Page B
| | |Gallagher, | |
| | | | |
| | | | |
| | |Eduardo Garcia, | |
| | |Holden, Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
------------------------------------------------------------------
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 if at
least 50% of its use is either to process recycled feedstock
that is intended to be reused in the production of another
product or utilizes recycled feedstock in the production of
another product or soil amendment.
2)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 (PRC) Section 40192.
3)Moves the definition of "project," which includes TPP that is
used in California for the design, manufacture, production, or
assembly of advanced manufacturing, advanced transportation
technologies, or alternative source products, components, or
systems from PRC Section 26003 to PRC Section 26011.8, in both
the active and dormant sections.
AB 199
Page C
4)Defines "recycled feedstock" as material that would otherwise
be destined for disposal, having completed its intended end
use and product lifecycle.
5)Provides that "soil amendments" may include "compost," as
defined under the Food and Agriculture Code (FAC) Section
14525, "gypsum" or "phosphatic sulfate gypsum," as defined
under FAC Section 14537, or a substance distributed for the
purpose of promoting plant growth or improving the quality of
crops by conditioning soils through physical means.
6)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 D
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 Assembly Appropriations
Committee, although there may be the potential redirection of
CAEATFA funds resulting from the eligibility expansion, the
total impact of all CAEATFA-approved sales and use tax
exclusions (STEs) to the General Fund is limited to $100 million
annually. Further, according to CAEATFA, all projects that are
approved for the STE have demonstrated that any costs to the
state will be offset by the increased economic activity created
by the project.
COMMENTS:
AB 199
Page E
1)Author's Statement: The author has provided the following
statement in support of this bill:
California exports 20 million tons of recyclables
annually, 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)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.
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
AB 199
Page F
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.
3)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
the project equals or exceeds the loss of sales and use tax.
4)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
AB 199
Page G
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.
The second provision of this bill provides a SUT exclusion for
--------------------------
<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 H
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. Finally, within
the second provision, this bill also provides a SUT exclusion
for TPP that primarily uses recycled feedstock to create soil
amendment.
5)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".
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 (Budget Committee), Chapter 69, Statutes
AB 199
Page I
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 environmental
benefit to the state, must exceed the cost of forgone SUT. No
such analysis is needed for the partial SUT exemption.
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916)
319-2098 FN:
0001557
AB 199
Page J