BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2334


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          Date of Hearing:  May 9, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          AB 2334  
          (Mullin) - As Introduced February 18, 2016


                                      SUSPENSE


          Majority vote.  Fiscal committee.  Tax levy. 


          SUBJECT:  Alternative energy financing


          SUMMARY:  Modifies the California Alternative Energy and  
          Advanced Transportation Financing Authority (CAEATFA) Act to  
          increase the annual amount of the sales and use tax (SUT)  
          exclusion available for allocation by the CAEATFA and to extend  
          the SUT exclusion to purchases of tangible personal property  
          (TPP) by certain contractors, as provided.  Specifically, this  
          bill:  


          1)Extends the SUT exclusion to a lease or transfer of title of  
            eligible TPP to any contractor for use in the performance of a  
            construction contract for the participating party that will  
            use that property as an integral part of the approved project  
            (a "construction contract"). 








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          2)Increases the annual amount of SUT exclusions available for  
            allocation to projects, including projects that involve  
            specified construction contracts, as follows:


             a)   For the 2016 calendar year, from $100 million to $575  
               million.


             b)   For the 2017 calendar year and each calendar year  
               thereafter, from $100 million to $350 million, plus any  
               amounts unused or not granted from the previous calendar  
               year. 


          3)Takes effect immediately as a tax levy.


          EXISTING LAW:  


          1)Authorizes CAEATFA to provide financial assistance to certain  
            facilities that use alternative energy sources and  
            technologies, develop advanced manufacturing, process recycled  
            feedstock, or develop and commercialize advanced  
            transportation technologies that conserve energy, reduce air  
            pollution, and promote economic development and jobs. 

          2)Allows CAEATFA to provide eligible projects financial  
            assistance in the form of a SUT exclusion on property used to  
            process recycled feedstock or used for the "design,  
            manufacture, production, or assembly" of advanced  
            manufacturing, advanced transportation technologies, or  
            alternative energy source products, components or system, as  
            defined.

          3)Requires a project to demonstrate that the benefits to the  








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            state from the project equals or exceeds the projected benefit  
            to the participating party from the SUT exclusion.

          4)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.  

          5)Repeals the CAEATFA's expanded authority to promote the use of  
            advanced manufacturing and recycled feedstock as of January 1,  
            2021.

          6)Imposes a sales tax on a retailer's gross receipts from the  
            retail sale of tangible personal property (TPP) in this state,  
            unless the sale is specifically exempt from taxation.  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:  Unknown


          COMMENTS:  


           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:



          "AB 2334 increases the annual award cap of the California  
            Alternative Energy and Advanced Transportation Authority  
            (CAEATFA) sales and use tax exclusion (STE) from $100 million  
            to $350 million and allows for rollover of unused funds from  
            previous years, in addition to other small program changes.   
            In doing so, AB 2334 gives CAEATFA the ability to further  
            incentivize California-based jobs and manufacturing, while  
            promoting clean technology and reducing pollution and energy  
            consumption."








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           2)Arguments in Support  .  The sponsor of this bill states that,  
            as of February 2016, the SUT exclusion program "reached its  
            annual award cap and is currently oversubscribed.  . . .   
            Oversubscription is due to increasing application numbers and  
            to the large scale of awards to electric vehicle and aerospace  
            companies."  The sponsor argues, "[w]ith the program's 2016  
            cap already oversubscribed, projects that would have  
            significant economic and environmental benefits to the state  
            will not receive an award."  



           3)CAEATFA Program:  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, and cogeneration and geothermal.  
             In 1994, the authority was renamed the "California  
            Alternative Energy and Advanced Transportation Financing  
            Authority" 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. 



          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.   
            Generally, CAEATFA is authorized to 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,  








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            local and tribal government facilities, as well as clean  
            renewable energy bonds for renewable energy projects.  
           4)CAEATFA's SUT Exclusion Program  .  CAEATFA is also allowed to  
            provide a SUT exclusion for certain specified projects.  The  
            first SUT exclusion was granted to Tesla in 2009.  Shortly  
            thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010,  
            expanded the SUT exclusion to apply to purchases of equipment  
            used for the design, manufacture, production, or assembly of  
            "advanced transportation technologies" and "alternative  
            source" products, components, or systems.  Alternative source  
            products include cogeneration technology; energy conservation;  
            and solar, biomass, wind, geothermal, specified  
            hydro-electric, or any other energy efficient technologies  
            that reduce the use of fossil and nuclear fuels.  In 2012, SB  
            1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced  
            manufacturing" to the list of eligible projects.   
            Consequently, the SUT exclusion program was enlarged to  
            include "advanced manufacturing" projects.  SB 1128 also  
            placed a $100 million cap on the amount of the SUT exclusion  
            that may be awarded in a calendar year.  



          In 2013, AB 1422 (Jobs, Economic Development and the Economy),  
            Chapter 540, Statutes of 2013, revised the definition of  
            "participating party" for purposes of the SUT exclusion to  
            include out-of-state and overseas entities.  AB 1422 allowed  
            an otherwise qualified out-of-state entity to apply for  
            financial assistance and the SUT exclusion.  The entity,  
            however, must commit and demonstrate that it will be opening a  
            manufacturing facility in California.   

            Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of  
            2015, further modified the SUT exclusion program to include  
            manufacturing projects that either process or utilize  
            "recycled feedstock."  The expanded program is due to sunset  
            on January 1, 2021.   










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           5)CAEATFA's Application Process for SUT Exclusion  .  California  
            provides several tax incentives designed to encourage socially  
            beneficial behavior, such as an increase in low-income  
            housing, research and development activity, and overall  
            economic activity.  A major policy concern when enacting a tax  
            incentive program is the possibility of rewarding behavior  
            that would have occurred in the absence of the subsidy, known  
            as "deadweight loss".  The possibility of rewarding, instead  
            of incentivizing, behavior has become an accepted reality for  
            almost all tax incentive programs.  The Legislature has  
            attempted to address this problem by creating tax incentives  
            programs that require potential beneficiaries to undergo a  
            rigorous application process to ensure, on a case-by-case  
            basis, that the state receives the desired benefit. 

          One of the prime examples of such programs is the SUT exclusion  
            administered by the CAEATFA.  The CAEATFA has established a  
            lengthy application process to ensure the efficient use of  
            state resources by requiring each applicant to demonstrate a  
            benefit to the state before an award may be granted.  Before a  
            SUT exclusion may be awarded, CAEATFA is required to determine  
            the eligibility of an individual project based on a number of  
            factors relating to the reduction in greenhouse gases and the  
            creation of manufacturing jobs.  Specifically, when evaluating  
            an application, CAEATFA must consider the extent to which the  
            project develops manufacturing facilities located in  
            California; the extent to which the project will create new,  
            permanent jobs in California; the extent to which the project  
            results in a reduction of greenhouse gases; the unemployment  
            rate in the area in which the project will be located; and any  
            other factors that CAEATFA deems appropriate in accordance  
            with this program, among other criteria.  Most important among  
            the factors is the requirement that applicants demonstrate a  
            "net benefit" to the state.  Known as the "net benefits" test,  
            this test quantifies the fiscal and environmental benefits of  
            the proposed project to ensure that the state receives a  
            benefit beyond the cost of the SUT exclusion and is one of the  
            most important factors that CAEATFA considers when awarding  








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            the exclusion.  In this manner, the test attempts to address  
            the "dead-weight" problem found within every subsidy.   
            Projects approved for the exclusion receive a full exemption  
            from the state and local portions of the SUT.  The full SUT  
            rate ranges from 7.5% to 10%, with a statewide average of  
            8.42%.  

            Once the exclusion has been granted, applicants are allowed  
            three years to use the award but can request extensions from  
            the CAEATFA Board.  Amounts awarded in previous years, but not  
            yet utilized, may not be recaptured by the CAEATFA.  In  
            November 2015, CAEATFA suspended acceptance of new  
            applications due to the proposed program revisions and the  
            development of the regulations to implement AB 199.   
            Currently, $25 million of the 2016 annual amount remains  
            unallocated. 

           6)What Does this Bill Do  ?  This bill proposes to modify the  
            existing CAEFTA program to:  (a) increase the aggregate award  
            amount available to eligible applicants in each calendar year,  
            starting with 2017; (b) allow a rollover of unallocated funds  
            to the following calendar year; and, (c) extend the SUT  
            exclusion to a project where a contractor leases or purchases  
            TPP for use in the performance of a construction contract for  
            the participating party, as provided.  With respect to the  
            award amount, this bill would increase the cap from $100  
            million to $575 million (which includes unused funds from  
            2010-2014 calendar years) for the 2016 calendar year and to  
            $350 million for the 2017 calendar year and each year  
            thereafter.   It appears that, of these amounts, at least $100  
            million plus any previously unallocated or unused amounts must  
            be allocated each calendar year, beginning with the 2017  
            calendar year, exclusively to projects other than the  
            specified construction contracts.  


           7)Oversubscription:  What is the Problem  ?  According to CAEATFA,  
            a very diverse group of applicants are applying for the same  
            funds.  Last year, CAETFA had a high number of applications  








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            requesting an allocation of the SUT exclusion, and the  
            existing cap of $100 million was quickly reached.  With the  
            expansion of the CAETFA program to include projects that  
            process or utilize recycled feedstock, the number of SUT  
            exclusion applications is expected to increase even more. 



          During this Committee's informational hearing on February 22,  
            2016, the Executive Director of CAEFTA testified that the  
            increased demand for the funds may be due to continued  
            economic recovery, newly added categories of eligible projects  
            and a number of applications requesting large SUT exclusion  
            amounts.  While historically small projects requesting less  
            than $2.1 million in SUT exclusions comprised almost 75% of  
            approved applications, in recent years CAEFTA has approved a  
            number of applications for large projects with more than $20  
            million in SUT exclusions, such as for example, the ones  
            submitted by Tesla, Atieva, Lockheed, Space X, and Solyndra.  

          Existing law does not impose a cap on the amount that a company  
            may request in SUT exclusions, nor does existing law  
            prioritize certain types of projects.  Thus, applications  
            involving large projects may utilize a considerable portion of  
            the allowable $100 million cap, leaving no funds for smaller  
            projects.  Furthermore, the CAEFTA does not have the authority  
            to utilize the unclaimed awards.  Finally, CAEFTA may not  
            award any amounts that remain unallocated in a particular  
            calendar year in the following years.  In other words, the  
            un-awarded SUT exclusion amounts simply disappear.  The author  
            believes that allowing a rollover of unallocated funds to the  
            following calendar year and substantially increasing the  
            annual SUT exclusion cap would help projects that would have  
            significant economic and environmental benefits to the state.   

           8)Partial SUT Exemption for Purchases of Manufacturing and R&D  
            Equipment  .   In 2013, Governor Brown signed AB 93 (Committee  
            on Budget), Chapter 69, Statutes of 2013, which reformed  
            California's economic development policies.  The new law  








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            eliminated enterprise zones and other geographically targeted  
            economic development areas and, instead, created three new tax  
            benefits:  (a) a temporary tax credit for wages paid by  
            taxpayers to qualified employees within former enterprise  
            zones, and other areas that suffer from high levels of poverty  
            and unemployment; (b) a temporary SUT exemption on purchases  
            of manufacturing equipment made by qualified taxpayers, capped  
            at $200 million annually per taxpayer; and, (c) the California  
            Competes Tax Credit program.  Existing law limits the total  
            annual amount of these three tax incentives to $750 million.  



          With the passage of AB 93, sales and leases of certain  
            manufacturing and R&D equipment may now qualify for the  
            temporary SUT partial exemption.  The partial exemption rate  
            is currently set at 4.1875%, which means that sales of  
            qualifying property sold to a qualified person are taxed at a  
            rate of 3.3125% (7.5% current statewide tax rate minus 4.1875%  
            partial exemption rate), plus any applicable district taxes.   
            The exemption is available for purchases made until July 1,  
            2022.  The program is generally self-certified, with little  
            oversight from the State Board of Equalization (BOE).  The  
            program was created in such a way as to allow the partial SUT  
            exemption to be taken immediately, without complicated forms  
            and procedures. 
            Unlike CAEATFA's SUT exclusion, the partial SUT exemption does  
            not necessarily attempt to encourage or incentivize beneficial  
            behavior.  Instead, the partial SUT exemption attempts to  
            reduce the distortion from the imposition of a tax on a tax,  
            otherwise known as "pyramiding".  When manufacturers pay a SUT  
            on tangible personal property, the tax is incorporated into  
            the cost of a consumer product, often leading to double  
            taxation.  Ideally, taxes should only be levied once because  
            pyramiding may cause consumers to favor goods and services  
            provided by a single company instead of those that require  
            multiple production steps. 










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           9)The Interaction of the Partial SUT Exemption and the CAEFTA  
            SUT Exclusion .  To a large degree, the CAEATFA SUT program  
            overlaps with the partial SUT exemption for manufacturing and  
            R&D equipment.  Thus, unless a project includes a purchase of  
            manufacturing or R&D equipment worth more than $200 million,  
            the purchase may qualify for the partial SUT exemption, which  
            requires no application or allocation.  However, as noted  
            above, the partial SUT exemption provides tax relief only for  
            the state portion of the SUT.  When the partial SUT exemption  
            was enacted, the BOE estimated that General Fund revenue would  
            decrease annually by more than $600 million ($637 million in  
            fiscal year (FY) 2014-15 and $681 million in FY 2015-16).   
            However, the most recent data demonstrates that the exemption  
            is currently underutilized.  The total exemption amount  
            claimed in FY 2014-15 was $91.2 million; in the first four  
            months of FY 2015-16, the amount was only $77.2 million.  The  
            underutilization problem may be due to complexities of the  
            program and/or may be attributed to the conditional nature of  
            the SUT exemption, where only a certain type of property and  
            purchasers qualify for the exemption.  It may be argued that  
            the partial nature of the exemption, where some amount of SUT  
            still needs to be collected by the vendor, also contributes to  
            the underutilization problem.  



            Meanwhile, the CAEATFA exclusion program has been  
            oversubscribed.  Although the program has no per-purchaser  
            limit, it is subject to the overall annual cap of $100 million  
            and most likely will be oversubscribed in 2016 and 2017.  In  
            the absence of legislative intent, it is unclear which types  
            of projects should receive priority.  





            The CAEATFA program had been in place for many years prior to  
            the enactment of the partial SUT exemption.  It is unknown  








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            whether the underutilization of one program has contributed to  
            the oversubscription for the other program or whether there is  
            any connection between the two programs.  However, in light of  
            the underutilization of the partial SUT exemption and  
            oversubscription of the CAEATFA program, the Committee may  
            consider restructuring the CAEATFA program to prioritize  
            certain projects, in addition to allowing the recapture of  
            allocated funds and rollover of unallocated funds.   
            Furthermore, as an alternative to the proposed increase in the  
            $100 million cap, the Committee may also consider authorizing  
            CAEATFA to exempt only the local portion of the SUT in the  
            case of projects that otherwise meet the eligibility  
            requirements for the partial SUT exemption.


           10)Construction Contracts: Definition of "Sale" or "Purchase.  "   
            In 2012, SB 1128 revised R&TC Section 6010.8, which authorizes  
            the SUT exclusion to allow a "participating party" to purchase  
            or lease qualified TPP directly from the seller, removing the  
            need for CAEATFA to act as an intermediary.  The term  
            "participating party" means, among others, a person, federal  
            or state agency, city or county, state college or university,  
            school district or other political entity engaged in the  
            business or operations in the state, whether for profit or  
            non-profit, that applies for financial assistance from the  
            CAEATFA for the purpose of implementing a project.  

          Prior to 2013, in order to qualify for the exemption, the  
            participating party had to purchase the property without  
            payment of tax and then resell the equipment to CAEATFA.  The  
            transfer was excluded from the SUT as a transfer from a  
            participating party to CAEATFA.  The participating party and  
            CAEATFA would then enter into a lease agreement and upon  
            complete installation of the TPP, ownership of that property  
            would be transferred from the CAEATFA to the participating  
            party.  Alternatively, CAEATFA was able to purchase the  
            specified equipment on behalf of the participating party,  
            financing the purchase through a bond or loan, and the  
            participating party would lease the equipment from CAEATFA.   








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            As the purchaser of the equipment, the CAEATFA paid no sales  
            tax on the purchase, nor was it required to collect the use  
            tax on the lease receipts.  SB 1128 simplified these  
            complicated sale-lease transactions that are not feasible for  
            business reasons by providing that a lease or transfer of TPP  
            constituting a "project" under the SB 71 Program to a  
            participating party is neither a "sale" nor "use" and, thus,  
                                                                  is exempt from the SUT.  

            This bill proposes to simplify sale-lease transactions further  
            for certain construction contracts.  According to CAEFTA, the  
            main purpose of this modification is to streamline the  
            application of the SUT exclusion for contractors and  
            subcontractors.  Existing law only covers transfers of title  
            of TPP property to the participating party, not a contractor  
            or subcontractor performing the work on the eligible project.   
            Thus, only the participating party may issue a certificate to  
            the retailers for the purchases of materials, fixtures,  
            machinery, equipment or other TPP.  Although a contractor may  
            be able to utilize the SUT exclusion in certain circumstances,  
            the process to ensure that the contractor is eligible to claim  
            the exclusion when purchasing TPP is complicated and  
            cumbersome.   Construction contractors and participating  
            parties must follow specific procedures when providing  
            exemption certificates to suppliers and preparing contractual  
            agreements.  Essentially, a construction contract must be  
            structured in a way, per BOE's instructions, that allows the  
            title to materials to be transferred from the vendor selling  
            TPP directly to the participating party.  In some instances, a  
            contractor may not be able to use the SUT exclusion because  
            the participating party has become eligible for the exclusion  
            after a contract was performed.  

            Usually, CAEATFA directs applicants to the BOE for advice  
            regarding the use of contractors since the BOE is responsible  
            for administering the SUT law.  To simplify the process, this  
            bill proposes to amend the existing definition of "sale" and  
            "purchase" in Section 6010.8 to allow any contractor to claim  
            the SUT exclusion when the contractor purchases TPP for use in  








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            the performance of a construction contract for the  
            participating party.  This provision would only apply if the  
            participating party will use the TPP as an integral part of  
            the approved project.  

            It seems that while increasing the overall annual allocation  
            amount for the SUT exclusion, this bill would require that at  
            least $100 million be awarded annually to projects other than  
            projects involving the abovementioned leases and purchases of  
            TPP by contractors.  Stated differently, this bill would  
            create two categories of projects:  projects that will become  
            eligible for the SUT exclusion award only after the effective  
            date of this bill and projects that are already eligible under  
            existing law.  Although unclear, it appears that the overall  
            annual allocation amount will depend on the type of projects  
            eligible for the awards. 

           11)Related Legislation  .  AB 1683 (Eggman) is similar to this  
            bill.  AB 1683, among other things, would increase the annual  
            amount of SUT exclusions available for annual allocations to  
            projects to $200 million.  AB 1683 will be heard by this  
            Committee today.
          REGISTERED SUPPORT / OPPOSITION:




          Support


          John Chiang, Treasurer, State of California (Sponsor)


          Proterra


          Motiv










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          California Against Waste


          California Manufacturers and Technology Association




          Opposition


          None on file




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098