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