Amended in Assembly April 14, 2015

California Legislature—2015–16 Regular Session

Assembly Bill No. 1090

Introduced by Assembly Member O'Donnell

February 27, 2015

An act to begin delete add end delete begin insert amend end insert Section begin delete 6377.2 to end delete begin insert 6377.1 of end insert the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

AB 1090, as amended, O'Donnell. Sales and use taxes: exemption: reshoring jobs.

Existing sales and use tax laws impose taxes on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Existing law provides various exemptions from the taxes imposed by those laws, including an exemption until July 1, 2022, or as provided, of the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person for use primarily in manufacturing, processing, refining, fabricating, or recycling of property, as specified; qualified tangible personal property purchased for use by a contractor for specified purposes, as provided; and qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development, as provided. begin insert Existing law provides that the exemption does not apply to any tangible personal property purchased during any calendar year that exceeds $200,000,000 of purchases of qualified tangible personal property. end insert

begin delete

This bill would exempt from those taxes, on and after January 1, 2016, the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased for use by a qualified person to be used primarily in any stage of reshoring jobs by qualified businesses engaged in manufacturing, research and development, and construction, as specified; qualified tangible personal property purchased for reshoring by a qualified person to be used primarily in research and development; qualified tangible personal property purchased for use by a qualified person to be used primarily for the reshoring of jobs by qualified businesses engaged in manufacturing, research and development, and construction; and qualified tangible personal property purchased for use by a contractor purchasing that tangible personal property for use in the performance of a construction contract for the qualified person, who will use that tangible personal property as an integral part of reshoring jobs by qualified businesses engaged in manufacturing, research and development, and construction for use in connection with those processes, as provided. The bill would require the purchaser to furnish the retailer with an exemption certificate, as specified.

end delete begin delete

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in conformity with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

end delete begin delete

This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes.

end delete begin insert

This bill would increase that $200,000,000 threshold to $500,000,000 for any calendar year on and after January 1, 2016, provided that $300,000,000 is for purchases of qualified tangible personal property that is used primarily for the purpose of reshoring or insourcing, defined to mean the relocation of a whole process, a piece of a process, a function, or a discrete piece of work from currently outside the boundaries of the United States to inside the boundaries of the state, either within or outside the boundaries of a company. This bill would require the city or county where the tangible personal property will be placed in service to issue a written certification that the relocation meets the definition of reshoring or insourcing, which the purchaser shall be required to furnish to the retailer for purposes of the exemption. By imposing a new duty on local governments, this bill would impose a state-mandated local program.

end insert begin insert

This bill would also extend the exemption until July 1, 2024, except as otherwise provided by existing law.

end insert begin insert

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

end insert begin insert

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

end insert

This bill would take effect immediately as a tax levy.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program:  begin delete no end delete begin insert yes end insert .

The people of the State of California do enact as follows:

begin insert

begin insert SECTION 1. end insert   

end insert

begin insert The Legislature finds and declares the following: end insert

begin insert

(a) Since 1997, the number of manufacturing facilities in the
United States has dropped by 17 percent, resulting in the loss of
six million American jobs.

end insert begin insert

(b) These significant losses are the result of an “offshoring”
movement, in which many American manufacturers closed their
domestic doors or expanded their facilities in foreign counties,
which sent millions of manufacturing jobs overseas.

end insert begin insert

(c) When these American companies moved or shifted their
expansions offshore, the economic benefit of spent wages and
related payroll, income, and consumer sales taxes associated with
those workers went with them.

end insert begin insert

(d) Some American companies are reconsidering their decision
to outsource work or operate facilities in foreign countries, or
both, in a trend referred to as “reshoring.” Since 2010, domestic
manufacturing employment has increased slightly as businesses
have begun to recognize the risks associated with a global supply
chain, including such factors as the variable price of oil, quality
and consistency of some product lines, increased foreign labor
costs, and overseas shipping costs, which have already driven at
least hundreds of companies to return to the United States.

end insert begin insert

(e) There exists an opportunity for policy makers to accelerate
this trend and return the United States to an era of manufacturing
growth. California has a time-sensitive opportunity to provide the
incentives necessary to draw manufacturing companies not only
back to the United States, but specifically into California.

end insert begin insert

(f) California will have a comparative advantage in competing
for “reshoring” companies through offsetting some of the initial
costs of relocating manufacturing to California by providing a
sales and use tax exemption.

end insert

begin insert

begin insert SEC. 2. end insert   

end insert

begin insert Section 6377.1 of the end insert begin insert Revenue and Taxation Code end insert begin insert is
amended to read: end insert

6377.1.  

(a) Except as provided in subdivision (e), on or after
July 1, 2014, and before July 1, begin delete 2022 end delete begin insert 2024 end insert , there are exempted
from the taxes imposed by this part the gross receipts from the sale
of, and the storage, use, or other consumption in this state of, any
of the following:

(1) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in any stage of the
manufacturing, processing, refining, fabricating, or recycling of
tangible personal property, beginning at the point any raw materials
are received by the qualified person and introduced into the process
and ending at the point at which the manufacturing, processing,
refining, fabricating, or recycling has altered tangible personal
property to its completed form, including packaging, if required.

(2) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in research and
development.

(3) Qualified tangible personal property purchased for use by
a qualified person to be used primarily to maintain, repair, measure,
or test any qualified tangible personal property described in
paragraph (1) or (2).

(4) Qualified tangible personal property purchased for use by
a contractor purchasing that property for use in the performance
of a construction contract for the qualified person, that will use
that property as an integral part of the manufacturing, processing,
refining, fabricating, or recycling process, or as a research or
storage facility for use in connection with those processes.

(b) For purposes of this section:

(1) “Fabricating” means to make, build, create, produce, or
assemble components or tangible personal property to work in a
new or different manner.

(2) “Manufacturing” means the activity of converting or
conditioning tangible personal property by changing the form,
composition, quality, or character of the property for ultimate sale
at retail or use in the manufacturing of a product to be ultimately
sold at retail. Manufacturing includes any improvements to tangible
personal property that result in a greater service life or greater
functionality than that of the original property.

(3) “Primarily” means 50 percent or more of the time.

(4) “Process” means the period beginning at the point at which
any raw materials are received by the qualified person and
introduced into the manufacturing, processing, refining, fabricating,
or recycling activity of the qualified person and ending at the point
at which the manufacturing, processing, refining, fabricating, or
recycling activity of the qualified person has altered tangible
personal property to its completed form, including packaging, if
required. Raw materials shall be considered to have been
introduced into the process when the raw materials are stored on
the same premises where the qualified person’s manufacturing,
processing, refining, fabricating, or recycling activity is conducted.
Raw materials that are stored on premises other than where the
qualified person’s manufacturing, processing, refining, fabricating,
or recycling activity is conducted shall not be considered to have
been introduced into the manufacturing, processing, refining,
fabricating, or recycling process.

(5) “Processing” means the physical application of the materials
and labor necessary to modify or change the characteristics of
tangible personal property.

(6) (A) “Qualified person” means a person that is primarily
engaged in those lines of business described in Codes 3111 to
3399, inclusive, 541711, or 541712 of the North American Industry
Classification System (NAICS) published by the United States
Office of Management and Budget (OMB), 2012 edition.

(B) Notwithstanding subparagraph (A), “qualified person” shall
not include either of the following:

(i) An apportioning trade or business that is required to apportion
its business income pursuant to subdivision (b) of Section 25128.

(ii) A trade or business conducted wholly within this state that
would be required to apportion its business income pursuant to
subdivision (b) of Section 25128 if it were subject to apportionment
pursuant to Section 25101.

(7) (A) “Qualified tangible personal property” includes, but is
not limited to, all of the following:

(i) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.

(ii) Equipment or devices used or required to operate, control,
regulate, or maintain the machinery, including, but not limited to,
computers, data-processing equipment, and computer software,
together with all repair and replacement parts with a useful life of
one or more years therefor, whether purchased separately or in
conjunction with a complete machine and regardless of whether
the machine or component parts are assembled by the qualified
person or another party.

(iii) Tangible personal property used in pollution control that
meets standards established by this state or any local or regional
governmental agency within this state.

(iv) Special purpose buildings and foundations used as an
integral part of the manufacturing, processing, refining, fabricating,
or recycling process, or that constitute a research or storage facility
used during those processes. Buildings used solely for warehousing
purposes after completion of those processes are not included.

(B) “Qualified tangible personal property” shall not include any
of the following:

(i) Consumables with a useful life of less than one year.

(ii) Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products that have
completed the manufacturing, processing, refining, fabricating, or
recycling process.

(iii) Tangible personal property used primarily in administration,
general management, or marketing.

(8) “Refining” means the process of converting a natural
resource to an intermediate or finished product.

(9) “Research and development” means those activities that are
described in Section 174 of the Internal Revenue Code or in any
regulations thereunder.

begin insert

(10) (A) “Reshoring” and “insourcing” means the relocation
of a whole process, a piece of a process, a function, or a discrete
piece of work, from currently outside the boundaries of the United
States, to inside the boundaries of the state of California, either
within or outside the boundaries of a company. This includes work
performed either as an affiliate or work outsourced to another
firm.

end insert begin insert

(B) The city or county where the tangible personal property will
be placed in service shall issue a written certification, in any
manner determined by the city or county, that the relocation meets
the definition of subparagraph (A).

end insert begin delete

(10)

end delete

begin insert (11) end insert  “Useful life” for tangible personal property that is treated
as having a useful life of one or more years for state income or
franchise tax purposes shall be deemed to have a useful life of one
or more years for purposes of this section. “Useful life” for tangible
personal property that is treated as having a useful life of less than
one year for state income or franchise tax purposes shall be deemed
to have a useful life of less than one year for purposes of this
section.

(c) An exemption shall not be allowed under this section unless
the purchaser furnishes the retailer with an exemption certificate
begin insert and the county or city certificate issued pursuant to paragraph
(10) of subdivision (b) end insert , completed in accordance with any
instructions or regulations as the board may prescribe, and the
retailer retains the exemption certificate in its records and furnishes
it to the board upon request.

(d) (1)    Notwithstanding the Bradley-Burns Uniform Local
Sales and Use Tax Law (Part 1.5 (commencing with Section 7200))
and the Transactions and Use Tax Law (Part 1.6 (commencing
with Section 7251)), the exemption established by this section
shall not apply with respect to any tax levied by a county, city, or
district pursuant to, or in accordance with, either of those laws.

(2) Notwithstanding subdivision (a), the exemption established
by this section shall not apply with respect to any tax levied
pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant
to Section 35 of Article XIII of the California Constitution, or any
tax levied pursuant to Section 6051 or 6201 that is deposited in
the State Treasury to the credit of the Local Revenue Fund 2011
pursuant to Section 6051.15 or 6201.15.

(e) (1) The exemption provided by this section shall not apply
to either of the following:

(A)  begin insert (i) end insert begin insert   end insert Any tangible personal property purchased begin insert (I) end insert during
any calendar year that exceeds two hundred million dollars
($200,000,000) of purchases of qualified tangible personal property
for which an exemption is claimed by a qualified person under
this section begin insert , and (II) during any calendar year on and after January
1, 2016, exceeds three hundred million dollars ($300,000,000) of
purchases of qualified tangible personal property for which an
exemption is claimed by a qualified person under this section, not
including the amounts of those purchases subject to subclause (I),
and that is used primarily for the purpose of reshoring or
insourcing end insert .

begin insert (ii) end insert begin insert   end insert For purposes of this subparagraph, in the case of a qualified
person that is required to be included in a combined report under
Section 25101 or authorized to be included in a combined report
under Section 25101.15, the aggregate of all purchases of qualified
personal property for which an exemption is claimed pursuant to
this section by all persons that are required or authorized to be
included in a combined report shall not exceed begin delete two hundred million
dollars ($200,000,000) end delete begin insert the amounts get forth in clause (i) end insert in any
calendar year.

(B) The sale or storage, use, or other consumption of property
that, within one year from the date of purchase, is removed from
California, converted from an exempt use under subdivision (a)
to some other use not qualifying for exemption, or used in a manner
not qualifying for exemption.

(2) If a purchaser certifies in writing to the seller that the tangible
personal property purchased without payment of the tax will be
used in a manner entitling the seller to regard the gross receipts
from the sale as exempt from the sales tax, and the purchase
exceeds the begin delete two-hundred-million-dollar ($200,000,000) limitation end delete
begin insert limitations end insert described in subparagraph (A) of paragraph (1), or
within one year from the date of purchase, the purchaser removes
that property from California, converts that property for use in a
manner not qualifying for the exemption, or uses that property in
a manner not qualifying for the exemption, the purchaser shall be
liable for payment of sales tax, with applicable interest, as if the
purchaser were a retailer making a retail sale of the tangible
personal property at the time the tangible personal property is so
purchased, removed, converted, or used, and the cost of the tangible
personal property to the purchaser shall be deemed the gross
receipts from that retail sale.

(f) This section shall apply to leases of qualified tangible
personal property classified as “continuing sales” and “continuing
purchases” in accordance with Sections 6006.1 and 6010.1. The
exemption established by this section shall apply to the rentals
payable pursuant to the lease, provided the lessee is a qualified
person and the tangible personal property is used in an activity
described in subdivision (a).

(g) (1) Upon the effective date of this section, the Department
of Finance shall estimate the total dollar amount of exemptions
that will be taken for each calendar year, or any portion thereof,
for which this section provides an exemption.

(2) No later than each March 1 next following a calendar year
for which this section provides an exemption, the board shall
provide to the Joint Legislative Budget Committee a report of the
total dollar amount of exemptions taken under this section for the
immediately preceding calendar year. The report shall compare
the total dollar amount of exemptions taken under this section for
that calendar year with the department’s estimate for that same
calendar year. If that total dollar amount taken is less than the
estimate for that calendar year, the report shall identify options for
increasing exemptions taken so as to meet estimated amounts.

(h) This section is repealed on January 1, begin delete 2023 end delete begin insert 2025 end insert .

begin delete

SECTION 1.  

Section 6377.2 is added to the Revenue and
Taxation Code, to read:

6377.2.  

(a) On and after January 1, 2016, there are exempted
from the taxes imposed by this part the gross receipts from the sale
of, and the storage, use, or other consumption in this state of, any
of the following:

(1) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in any stage of reshoring
jobs by qualified businesses engaged in manufacturing, research
and development, and construction beginning at the point any raw
materials are received by the qualified person and introduced into
the process and ending at the point at which the manufacturing,
processing, refining, fabricating, or recycling has altered tangible
personal property to its completed form, including packaging, if
required.

(2) Qualified tangible personal property purchased for reshoring
by a qualified person to be used primarily in research and
development.

(3) Qualified tangible personal property purchased for use by
a qualified person to be used primarily for the reshoring of jobs
by qualified businesses engaged in manufacturing, research and
development, and construction described in paragraph (1) or (2).

(4) Qualified tangible personal property purchased for use by
a contractor purchasing that tangible personal property for use in
the performance of a construction contract for the qualified person,
who will use that tangible personal property as an integral part of
reshoring jobs by qualified businesses engaged in manufacturing,
research and development, and construction for use in connection
with those processes.

(b) For purposes of this section:

(1) “Fabricating” means to make, build, create, produce, or
assemble components or tangible personal property to work in a
new or different manner.

(2) “Manufacturing” means the activity of converting or
conditioning tangible personal property by changing the form,
composition, quality, or character of the tangible personal property
for ultimate sale at retail or use in the manufacturing of a product
to be ultimately sold at retail. Manufacturing includes any
improvements to tangible personal property that result in a greater
service life or greater functionality than that of the original tangible
personal property.

(3) “Primarily” means 50 percent or more of the time.

(4) “Process” means the period beginning at the point at which
any raw materials are received by the qualified person and
introduced into the manufacturing, processing, refining, fabricating,
or recycling activity of the qualified person and ending at the point
at which the manufacturing, processing, refining, fabricating, or
recycling activity of the qualified person has altered tangible
personal property to its completed form, including packaging, if
required. Raw materials shall be considered to have been
introduced into the process when the raw materials are stored on
the same premises where the qualified person’s manufacturing,
processing, refining, fabricating, or recycling activity is conducted.
Raw materials that are stored on premises other than where the
qualified person’s manufacturing, processing, refining, fabricating,
or recycling activity is conducted, shall not be considered to have
been introduced into the manufacturing, processing, refining,
fabricating, or recycling process.

(5) “Processing” means the physical application of the materials
and labor necessary to modify or change the characteristics of
tangible personal property.

(6) “Reshoring” means ____.

(7) “Qualified business” means ____.

(8) “Qualified person” means a person that is primarily engaged
in those lines of business described in Codes 3111 to 3399,
inclusive, or 5112 of the North American Industry Classification
System (NAICS) published by the United States Office of
Management and Budget (OMB), 2012 edition.

(9) (A) “Qualified tangible personal property” includes, but is
not limited to, all of the following:

(i) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.

(ii) Equipment or devices used or required to operate, control,
regulate, or maintain the machinery, including, but not limited to,
computers, data processing equipment, and computer software,
together with all repair and replacement parts with a useful life of
one or more years therefor, whether purchased separately or in
conjunction with a complete machine and regardless of whether
the machine or component parts are assembled by the qualified
person or another party.

(iii) Tangible personal property used in pollution control that
meets standards established by this state or any local or regional
governmental agency within this state.

(iv) Special purpose buildings and foundations used as an
integral part of the manufacturing, processing, refining, fabricating,
or recycling process, or that constitute a research or storage facility
used during those processes. Buildings used solely for warehousing
purposes after completion of those processes are not included.

(B) “Qualified tangible personal property” shall not include any
of the following:

(i) Consumables with a useful life of less than one year.

(ii) Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products that have
completed the manufacturing, processing, refining, fabricating, or
recycling process.

(iii) Tangible personal property used primarily in administration,
general management, or marketing.

(10) “Research and development” means those activities that
are described in Section 174 of the Internal Revenue Code or in
any regulations thereunder.

(11) “Refining” means the process of converting a natural
resource to an intermediate or finished product.

(12) “Useful life” has the same meaning as provided for in Part
10 (commencing with Section 17001), or Part 11 (commencing
with Section 23001), as applicable.

(c) An exemption shall not be allowed under this section unless
the purchaser furnishes the retailer with an exemption certificate,
completed in accordance with any instructions or regulations as
the board may prescribe, and the retailer retains the exemption
certificate in its records and furnishes it to the board upon request.
The exemption certificate shall contain the cost of the qualified
tangible personal property that the sale of, or the storage, use, or
other consumption of, is exempt pursuant to subdivision (a).

(d) Notwithstanding the Bradley-Burns Uniform Local Sales
and Use Tax Law (Part 1.5 (commencing with Section 7200)) and
the Transactions and Use Tax Law (Part 1.6 (commencing with
Section 7251)), the exemption established by this section shall not
apply with respect to any tax levied by a county, city, or district
pursuant to, or in accordance with, either of those laws.

(e) (1) Notwithstanding subdivision (a), the exemption provided
by this section shall not apply to any sale or storage, use, or other
consumption of tangible personal property that, within one year
from the date of purchase, is removed from California, converted
from an exempt use under subdivision (a) to some other use not
qualifying for exemption, or used in a manner not qualifying for
exemption.

(2) If a purchaser certifies in writing to the seller that the tangible
personal property purchased without payment of the tax will be
used in a manner entitling the seller to regard the gross receipts
from the sale as exempt from the sales tax, and within one year
from the date of purchase, the purchaser removes that tangible
personal property outside California, converts that tangible personal
property for use in a manner not qualifying for the exemption, or
uses that tangible personal property in a manner not qualifying for
the exemption, the purchaser shall be liable for payment of sales
tax, with applicable interest, as if the purchaser were a retailer
making a retail sale of the tangible personal property at the time
the tangible personal property is so removed, converted, or used,
and the cost of the tangible personal property to the purchaser shall
be deemed the gross receipts from that retail sale.

end delete

begin insert

begin insert SEC. 3. end insert   

end insert begin insert

If the Commission on State Mandates determines that
this act contains costs mandated by the state, reimbursement to
local agencies and school districts for those costs shall be made
pursuant to Part 7 (commencing with Section 17500) of Division
4 of Title 2 of the Government Code.

end insert

begin delete SEC. 2. end delete
begin insert SEC. 4. end insert   

This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.