BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1032


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          Date of Hearing:  April 27, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 1032  
          (Salas) - As Introduced February 26, 2015





                                      SUSPENSE


          Majority vote.  Fiscal committee.  


          SUBJECT:  Diesel Fuel Tax Law:  reimbursements


          SUMMARY:  Provides that, where tax is not imposed on dyed  
          blended biodiesel fuel upon removal from the terminal rack, if  
          tax was previously imposed on the biodiesel fuel portion, then a  
          claim for refund is allowed for the tax paid on that biodiesel  
          fuel.  Specifically, this bill:  


          1)Provides that the claim for refund shall only be allowed to  








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            the extent a supplier can show that the tax on that biodiesel  
            fuel has been paid by the same supplier. 

          2)Makes other technical and conforming changes to the Diesel  
            Fuel Tax Law.     

          EXISTING LAW: 


          1)Imposes a tax, under the Diesel Fuel Tax Law, upon the  
            removal, entry, sale, delivery, or specified use of diesel  
            fuel, at a specified rate per gallon.  

          2)Provides for a reimbursement of the amount of the tax to  
            persons who have used tax-paid fuel for specified nontaxable  
            uses, which is allowed through a claim for refund.  

          FISCAL EFFECT:  The State Board of Equalization (BOE) estimates  
          that this bill would have resulted in roughly $779,000 in  
          refunds in fiscal year (FY) 2012-13, and roughly $2.83 million  
          in FY 2013-14.  


          COMMENTS:  


          1)The author has provided the following statement in support of  
            this bill:

               The Diesel Fuel Tax Law imposes a per gallon tax upon the  
               removal, entry, sale, or delivery of diesel fuel.  The law  
               allows for an exemption (via tax refund) when diesel is  
               dyed and intended for off-highway use such as for machinery  
               and equipment used for farming, mining, logging, and  
               construction.  

               Biodiesel, often sold when blended with traditional  
               petroleum diesel, is considered to be a diesel fuel and  
               subject to the same taxes.  Therefore, biodiesel is taxed  








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               upon its entry into California or its removal from a  
               refinery or distribution facility.  However, when the  
               tax-paid biodiesel is blended with tax-exempt diesel fuel,  
               the biodiesel portion is not provided the same tax exempt  
               status for off-highway uses.  [. . .] 

               While current law allows reimbursement for tax paid on  
               diesel fuel intended for off-highway uses that has been  
               taxed more than once, it does not account for tax-paid  
               biodiesel blends.  In such cases, the supplier is unable to  
               recover the tax from the customer and is also unable to  
               seek reimbursement for the tax from the Board of  
               Equalization. 

               AB 1032 seeks to remedy this by creating a refund mechanism  
               for amounts of tax paid on the biodiesel fuel portion of  
               dyed blended biodiesel fuel removed from an approved  
               refinery or distribution facility if a supplier can show  
               that the tax on that biodiesel fuel has been paid by the  
               same supplier.  

          2)Proponents of this bill note the following:

               AB 1032 would help level the playing field for biodiesel in  
               California.  The Diesel Fuel Tax Law, which imposes a tax  
               on diesel fuel, currently provides for a reimbursement for  
               the amount of that tax to entities who have used that  
               tax-paid fuel in certain nontaxable uses.  However, because  
               clear biodiesel is currently transported to terminals for  
               blending by truck rather than pipeline, biodiesel  
               producers, who have paid the Diesel Fuel excise or "road  
               tax," must charge the refiner/blenders for the tax, and the  
               refiner/blender is not currently able to recoup the funds  
               for the tax paid on the biodiesel fuel portion of dyed  
               blended diesel fuel removed from the terminal.  We believe  
               that allowing for a reimbursement (through a claim for  
               refund), when the supplier can show that they have paid the  
               tax on that biodiesel removed from an approved terminal, is  
               a necessary and widely agreed upon solution to this  








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               problem.  

          3)The BOE notes the following in its staff analysis of this  
            bill:

               The BOE would not have any administrative issues with the  
               refund provisions.  The BOE administers all provisions of  
               the [Diesel Fuel Tax Law], including the exemption and  
               refund provisions.  BOE staff works closely with the fuel  
               industry to remain aware of industry trends and practices,  
               and provides information and assistance in the form of  
               special notices, publications and reports, answers to  
               frequently asked questions, and newsletters.  The BOE has  
               previously provided guidance to suppliers that refunds are  
               not allowed for tax-paid biodiesel fuel converted to dyed  
               biodiesel fuel.   


          4)Committee Staff Comments:  
           
              a)   The Diesel Fuel Tax Law  :  Under the Diesel Fuel Tax Law,  
               a per-gallon excise tax is imposed on the removal of diesel  
               fuel at the refinery or terminal rack, upon entry into  
               California, or upon sale to an unlicensed person.  

               Existing law defines a "terminal" as a distribution  
               facility supplied by pipeline or vessel, from which the  
               diesel fuel may be removed at the rack.  The term also  
               includes a diesel fuel production facility (i.e., a  
               refinery) with storage facilities not supplied by pipeline  
               or vessel.  These diesel fuel production facilities have  
               the same licensing and reporting requirements as those  
               terminals supplied by pipeline or vessel.


               Generally, a "supplier" of diesel fuel owes the excise tax  
               at the time the fuel is removed from the terminal rack.   
               However, if the diesel fuel enters California outside of  
               the bulk transfer/terminal system (i.e., "below the rack"  








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               by train or truck), the excise tax is due upon entry into  
               California.


               The term "supplier" includes, among others, a person owning  
               fuel in a terminal (i.e., a "position holder"), a refiner,  
               an importer, a blender, and a terminal operator.  The BOE  
               requires suppliers to be licensed and to file monthly  
               returns or information reports detailing the amount of fuel  
               entered, received, removed, and stored.


              b)   Exemptions and refunds  :  Certain sales by diesel fuel  
               suppliers are exempt from the excise tax, including sales  
               for use outside California, and sales of dyed diesel fuel.   
               Thus, certain parties may claim a credit or refund for tax  
               paid on fuel that is subsequently used in a nontaxable  
               manner.

              c)   Biodiesel  :  Under California law, biodiesel is  
               considered to be a diesel fuel and is subject to the excise  
               tax on diesel fuel.  The fuel industry generally describes  
               biodiesel according to the applicable percentage of  
               biodiesel blended with petroleum diesel.  For example, "B5"  
               would represent a blend comprised of 95% petroleum diesel  
               and 5% biodiesel.  

               Most domestically produced biodiesel comes from the  
               Midwest.  Because distribution of this biodiesel occurs  
               outside of the normal bulk transfer/terminal system, the  
               excise tax applies upon the fuel's entry into California.   
               As such, the "enterer" is responsible for the diesel fuel  
               tax when the fuel enters California.  Biodiesel that is  
               produced in California, on the other hand, is generally  
               taxed upon removal from the fuel production facility.  


               In either case, when another supplier makes a subsequent  
               purchase of this tax-paid biodiesel to create a blended  








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               diesel fuel, the tax-paid biodiesel fuel is blended with  
               "ex-tax" diesel fuel.  When this blended fuel is  
               subsequently removed from the terminal rack, it results in  
               tax being assessed twice on the biodiesel portion.  In such  
               cases, the state allows the supplier to claim a credit on  
               their return.  


               Some suppliers, however, have been unable to obtain a  
               credit or refund for taxes paid on biodiesel that enters  
               California, or is produced in-state, and is delivered into  
               their terminals as tax-paid, but is subsequently removed at  
               the terminal rack for a nontaxable purpose.  In other  
               words, while current law allows reimbursement for tax paid  
               on diesel fuel that has been taxed more than once, the  
               current statutory regime does not account for tax-paid  
               diesel fuel that is taxed coming into the terminal but  
               removed for nontaxable purposes (i.e., dyed biodiesel  
               blends).  In such cases, the supplier is unable to recover  
               the tax from the customer and is also unable to seek  
               reimbursement for the tax from the BOE.  Since the tax-paid  
               biodiesel portion is blended with ex-tax dyed diesel fuel,  
               it is not subject to taxation when removed from the  
               terminal rack.  Because there is no subsequent taxable  
               event with which to claim the credit, the current statute  
               does not provide for a reimbursement of the tax-paid  
               portion of the biodiesel.


              d)   What would this bill do  ?  This bill allows a diesel fuel  
               tax refund to a supplier for that portion of tax-paid  
               biodiesel fuel removed from the terminal rack as a dyed  
               biodiesel blend.

              e)   Why does this all seem so familiar  ?  During the 2013-14  
               Legislative Session, this Committee introduced AB 2757  
               (Committee on Revenue and Taxation), which contained  
               provisions substantially identical to the present bill.  AB  
               2757 passed the Assembly Floor by a vote of 76 to 0.  In  








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               the Senate, however, AB 2757 was substantially amended and  
               the tax-related provisions were removed from the bill.  The  
               diesel fuel provisions were then added to AB 2756  
               (Committee on Revenue and Taxation), which the Governor  
               vetoed for unrelated provisions dealing with the  
               administration of property taxes.   


           REGISTERED SUPPORT / OPPOSITION:




          Support


          California Biodiesel Alliance 


          California Independent Oil Marketers Association 




          Opposition


          None on file




          Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)  
          319-2098













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