BILL ANALYSIS Ó
AB 1247
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Date of Hearing: May 11, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1247
Irwin - As Amended March 24, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exemption: organic input
material
SUMMARY: Provides a sales and use tax (SUT) exemption for
"organic input material" to be applied to land, the products of
which are to be used as food for human consumption or are to be
sold in the regular course of business. Specifically, this
bill:
1)Defines "organic input material" as auxiliary soil and plant
substance, specialty fertilizer, or soil amendment, excluding
pesticides, that complies with the requirements of the
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National Organic Program standards, as specified in the Code
of Federal Regulations.
2)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for SUT revenues lost as a
result of this exemption.
3)Takes immediate effect as a tax levy, but only becomes
operative on the first day of the first calendar quarter
commencing more than 90 days after this bill's effective date.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state.
2)Imposes a complimentary use tax on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser, and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
3)Provides a SUT exemption for all of the following:
a) Any form of animal life the products of which ordinarily
constitute food for human consumption;
b) Feed for any form of animal life the products of which
ordinarily constitute food for human consumption or are to
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be sold in the regular course of business;
c) Seeds and plants the products of which ordinarily
constitute food for human consumption or are to be sold in
the regular course of business;
d) Fertilizer to be applied to land the products of which
are to be used as food for human consumption or are to be
sold in the regular course of business; and,
e) Drugs or medicines, including oxygen, the primary
purpose of which is the prevention or control of disease,
that are administered to animal life the products of which
ordinarily constitute food for human consumption.
FISCAL EFFECT: The BOE estimates that this bill will reduce
state and local revenues by $1 million annually.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
The state has numerous goals promoting the creation and use
of compost. Composting diverts organic waste from the
landfill and has been identified as a cost effective method
to reduce greenhouse gas emissions. Further, the
application of compost in agriculture and landscaping has
been shown to offer significant soil carbon sequestration
and water quality benefits, provide erosion control, reduce
the need for synthetic and fertilizers and pesticides, and
conserve water and energy required for irrigation.
Though compost provides significant benefits to our economy
and environment, it remains unclear in tax code and in its
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enforcement, as to which organic input materials are exempt
from sales tax. AB 1247 seeks to clarify that all
certified organic input material used for food production
are exempt from sales tax.
2)This bill is sponsored by the California Compost Coalition,
which notes the following:
AB 856 approved by the Legislature and signed by the
Governor in 2009, revised the definition of fertilizer to
include organic input materials in order for organic soil
amendments to share the same tax relief as petroleum based
fertilizers.
In the case of Agromin, its compost meets the definition of
an organic input material under Section 14550.5 and thus
qualifies as a fertilizing material. However, the SBE
(State Board of Equalization) is requiring Agromin to
register its primary product as a specialty fertilizer -
rather than as compost - with the CDFA even though
Agromin's compost is delivered to its commercial
agricultural customers as an agricultural mineral and a
fertilizing material identified as an organic input
material. It is OMRI (Organic Material Review Institute)
listed as a crop fertilizer and registered with CDFA as an
Organic Input Material.
Despite AB 856 there continues to be inconsistent
interpretations of what organic input material is exempt
and what is not because the SBE uses definitions in the Tax
Code and not the Food and Agriculture Code. We need
statutory clarification that all OMRI certified organic
input material will qualify for the same food tax sales
[sic] exemption.
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Consequently, Agromin has been directed to collect sales
taxes and even refund back taxes. This is both grossly
inequitable and directly contrary to the Administration's
initiative to promote healthy soils.
3)The BOE notes the following in its staff analysis of this
bill:
a) Effect of the bill : "This bill exempts from sales and
use tax the sales of certain organic input materials to be
applied to land, provided the land is used to produce food
products or products to be sold in the regular course of
business. The bill defines 'organic input material' as
auxiliary soil and plant substances, specialty fertilizers,
and soil amendments that comply with the National Organic
Program standards. Accordingly, based on BOE's Sales and
Use Tax Regulation 1588, sales of non-organic auxiliary
soil and plant substances and soil amendments would remain
subject to tax."
b) Identifying exempt organic input material products
appears uncomplicated : "The CDFA's Organic Input Material
Program registers and maintains a list of organic input
materials on its website. The list includes the firm name
and product, brand name, or trademark information."
c) Sales and use tax exemption of fertilizer applies to
organic and non-organic fertilizers : "As previously
stated, Regulation 1588 defines the term 'fertilizer' to
include commercial fertilizers, agricultural minerals,
manure, and carbon dioxide. The terms commercial
fertilizer and agricultural minerals are defined in the FAC
and include both organic and non-organic substances. To
qualify for the exemption, the fertilizer must be applied
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to land to produce food, feed for food animals (including
pasture grasses), and products to be sold by the purchaser
(e.g., flowers). Auxiliary soil and plant substances and
soil amendments (organic and non-organic) are specifically
excluded from the definition of fertilizer, and are thus
subject to tax."
d) Definition of "organic input material" : "Organic input
material" is defined in FAC Section 14550.5 [. . .]. The
bill's definition of organic input material is similar to
Section 14550.5, with the exception that it does not
include the terms 'commercial fertilizer' or 'agricultural
mineral' and does not require that the organic input
material is to be used in organic crop and food production.
According to the author's office, the bill's definition
does not include these terms because they are already
exempt under current law. Additionally, the proposed
exemption is intended to apply to organic input material
used in both organic and non-organic crop and food
production. To avoid confusion, BOE staff recommends using
[the] Section 14550.5 definition for organic input
material, and including a provision to specify,
notwithstanding Section 14550.5, organic input material may
be used in non-organic farming. BOE staff will work with
the author's office to address this concern."
4)Committee Staff Comments
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
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b) How is a tax expenditure different from a direct
expenditure ? As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. While this affords taxpayers greater financial
predictability, it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. Second, there is generally no control over
the amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) An overview of the SUT Law : California's SUT Law
imposes a sales tax on retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon a retailer's gross receipts from TPP sales in
California. The SUT Law also imposes a mirror "use tax" on
the storage, use, or other consumption of TPP purchased
out-of-state and brought into California. The use tax is
imposed on the purchaser, and unless the purchaser pays the
use tax to an out-of-state retailer registered to collect
California's use tax, the purchaser remains liable for the
tax. The use tax is set at the same rate as the state's
sales tax and must generally be remitted to the BOE.
The SUT represents the state's second largest source of
General Fund (GF) revenues. Nevertheless, the past 60
years have seen a dramatic reduction in the state's
reliance on the SUT and a corresponding increase in its
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reliance on personal income tax revenues. In fiscal year
(FY) 2014-15, SUT revenues are estimated to comprise 23% of
the state's GF revenues, down from nearly 60% in FY
1950-51.
d) What accounts for the state's reduced reliance on SUT
revenues ? The SUT Law was enacted in a very different era.
In the 1930s, California's economy was largely dominated
by manufacturing, and residents mostly bought and sold
tangible goods. Thus, in establishing the base for a new
consumption tax, it made sense to impose the tax on sales
of TPP, defined as personal property that may be "seen,
weighed, measured, felt, or touched." Over the past 80
years, however, California's economy has seen a dramatic
growth in the service and information sectors, resulting in
a significant erosion of the SUT base. For example, the
Commission on the 21st Century Economy noted that spending
on taxable goods represented 34.6% of personal income in
2008, down from 55.4% in 1980. As a result, tax experts
and economists from across the political spectrum argue
that California should expand its SUT base.
It could be argued that, while well-intentioned, additional
SUT exemptions further erode an already shrinking SUT base.
This, in turn, increases fiscal pressures to maintain or
even increase California's relatively high SUT rate. High
rates arguably promote non-compliance and encourage
out-of-state purchases, placing California retailers at a
competitive disadvantage. High rates also risk impacting
consumer decision-making, which runs counter to widely
accepted principles of sound tax policy.
e) The SUT exemption for fertilizer : As noted above,
existing law provides a complete SUT exemption for
"[f]ertilizer to be applied to land the products of which
are to be used as food for human consumption or are to be
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sold in the regular course of business." (Revenue and
Taxation Code Section 6358(d).) BOE SUT Regulation 1588,
in turn, defines the term "fertilizer" to include
"commercial fertilizers", "agricultural minerals",
"manure", and carbon dioxide. Each of these terms is
further defined as follows:
i) "Commercial fertilizer" : This term is defined by
reference to Food and Agricultural Code (FAC) Section
14522 as any substance containing 5% or more of nitrogen
(N), available phosphoric acid (P2O5), or soluble potash
(K2O), singly or collectively, which is distributed in
this state for promoting or stimulating plant growth.
"Commercial fertilizer" includes both agricultural and
specialty fertilizers. "Specialty fertilizers" may
contain less than 5% nitrogen (N), available phosphoric
acid (P2O5), or soluble potash (K2O), singly or
collectively.
ii) "Agricultural minerals" : This term is defined by
reference to FAC Section 14512 as any substance with
nitrogen (N), available phosphoric acid (P2O5), and
soluble potash (K2O), singly or in combination, in
amounts less than 5% which is distributed for farm use,
or any substance only containing recognized essential
secondary nutrients or micronutrients in amounts equal or
greater than minimum amounts specified by regulation and
distributed in this state as a source of these nutrients
for the purpose of promoting plant growth. This term
specifically includes gypsum, liming materials, manure,
wood fly ash, sewage sludge not qualifying as commercial
fertilizer, and captured dilute solutions.
iii) "Manure" : This term is defined as the excreta of
any domestic animal or domestic fowl which is not
artificially mixed with any material except a material
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which has been used for bedding, sanitary, or feeding
purposes for such an animal or fowl or for the
preservation of the manure.
BOE SUT Regulation 1588 specifically excludes from the
definition of "fertilizer" both "packaged soil amendments"
and "auxiliary soil and plant substances" defined as
follows:
i) "Packaged soil amendments" : This term is generally
defined by reference to FAC Section 14552 as any
substance distributed for the purpose of promoting plant
growth or improving the quality of crops by conditioning
soils solely through physical means. The term includes:
(1) Hay;
(2) Straw;
(3) Peat moss;
(4) Leaf mold;
(5) Sand;
(6) Wood products;
(7) Any product or mixture of products intended
for use as a potting medium, planting mix, or soilless
growing media; and,
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(8) Any other substance or product which is
intended for use solely because of its physical
properties.
ii) "Auxiliary soil and plant substances" : This term is
generally defined by reference to FAC Section 14513 as
any chemical or biological substance or mixture of
substances or device distributed in California to be
applied to soil, plants, or seeds for soil corrective
purposes; or that is intended to improve germination,
growth, yield, product quality, reproduction, flavor, or
other desirable characteristics of plants; or that is
intended to produce any chemical, biochemical,
biological, or physical change in soil. The term
includes:
(1) Bacterial inoculants;
(2) Biotics;
(3) Lignin or humus preparations;
(4) Microbial products, including genetically
engineered microorganisms;
(5) Soil binding agents;
(6) Synthetic polyelectrolytes;
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(7) Wetting agents to promote water penetration;
and,
(8) Any similar product intended to be used for
influencing soils, plant growth, or crop or plant
quality.
f) The 2009 legislation : On October 11, 2009, the Governor
signed AB 856 (Caballero), Chapter 257, Statutes of 2009.
Among other things, AB 856 amended the definition of
"fertilizing material" contained in FAC Section 14533 to
include organic input material. AB 856 also added FAC
Section 14550.5 to provide the following definition for
"organic input material":
[A]ny bulk or packaged commercial fertilizer,
agricultural mineral, auxiliary soil and plant substance,
specialty fertilizer, or soil amendment, excluding
pesticides, that is to be used in organic crop and food
production and that complies with the requirements of the
National Organic Program standards, as specified in Part
205 (commencing with Section 205.1) of Subchapter M of
Chapter I of Subtitle B of Title 7 of the Code of Federal
Regulations.
The author's office notes that this change provided an
opportunity for suppliers of compost or organic input
materials to be certified to ensure the quality and
integrity of their products.
g) What would this bill do ? This bill would define
"organic input material", eligible for the SUT exemption,
as auxiliary soil and plant substance, specialty
fertilizer, or soil amendment, excluding pesticides, that
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complies with the requirements of the National Organic
Program standards, as specified in the Code of Federal
Regulations.
i) Auxiliary soil and plant substances : Currently,
auxiliary soil and plant substances (e.g., bacterial
inoculants, lignin or humus preparations, etc.) are
specifically excluded by regulation from the definition
of exempt fertilizers. Thus, if this bill were enacted,
it appears that the taxation of auxiliary soil and plant
substances would depend on whether the materials comply
with the requirements of the National Organic Program
standards, with organic materials generally qualifying
for the SUT exemption and non-organic materials not
qualifying.
ii) Specialty fertilizer : The BOE notes that currently
"specialty fertilizers that are organic input materials
are exempt from the sales and use tax." Thus, it does
not appear that this bill would result in any change to
the current taxation of specialty fertilizers.
iii) Soil amendments : Currently, BOE SUT Regulation 1588
specifically excludes "packaged soil amendments" from the
definition of exempt "fertilizer". This term includes
things like hay, straw, and peat moss. This bill, in
turn, includes soil amendments within the definition of
"organic input materials". Thus, if this bill were
enacted, it appears that the taxation of soil amendments
would depend on whether the soil amendments are organic
(in which case they would qualify for the SUT exemption)
or non-organic (in which case they would be taxable).
h) Absence of a sunset date : In its current form, this
bill's proposed tax expenditure lacks an automatic sunset
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provision. This Committee has a longstanding policy
favoring the inclusion of sunset dates to allow the
Legislature periodically to review the efficacy and cost of
such programs. The author may wish to consider the
addition of an appropriate sunset provision.
REGISTERED SUPPORT / OPPOSITION:
Support
California Compost Coalition (Sponsor)
Agromin
Association of Compost Producers
Atlas Refuel
California League of Conservation Voters
Californians Against Waste
Cedar Avenue Recycling and Transfer Station
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City and County of San Francisco Department of the Environment
Community Alliance with Family Farmers
Marin Sanitary Service
Mt. Diablo Resource Recovery Park
Napa Recycling and Waste Services
Northern Recycling Compost
Quackenbush Mt. Resource Recovery & Compost
Recology
Sonoma Compost
StopWaste
Tracy Delta Solid Waste Management
Upper Valley Recycling Compost
West Marin Environmental Action Committee
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Zanker Materials Recovery & Landfill
Z-Best Composting
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098