BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                    AB 2334


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          ASSEMBLY THIRD READING


          AB  
          2334 (Mullin and Ting)


          As Amended  May 27, 2016


          2/3 vote.  Tax levy


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Revenue &       |9-0  |Ridley-Thomas,        |                    |
          |Taxation        |     |Brough, Dababneh,     |                    |
          |                |     |Gipson, Mullin,       |                    |
          |                |     |O'Donnell, Patterson, |                    |
          |                |     |Quirk, Wagner         |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Appropriations  |20-0 |Gonzalez, Bigelow,    |                    |
          |                |     |Bloom, Bonilla,       |                    |
          |                |     |Bonta, Calderon,      |                    |
          |                |     |Chang, Daly, Eggman,  |                    |
          |                |     |Gallagher, Eduardo    |                    |
          |                |     |Garcia, Roger         |                    |
          |                |     |HernŠndez, Holden,    |                    |
          |                |     |Jones, Obernolte,     |                    |
          |                |     |Quirk, Santiago,      |                    |
          |                |     |Wagner, Weber, Wood   |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
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                                                                    AB 2334


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          SUMMARY:  Modifies the California Alternative Energy and  
          Advanced Transportation Financing Authority (CAEATFA) Act and  
          extends the sales and use tax (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"). 


          2)Authorizes CAEATFA, for the 2017 calendar year and each  
            calendar year thereafter, to allocate previously unused or  
            unallocated amounts of the SUT exclusion from the calendar  
            year immediately preceding the year of allocation. 


          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,  








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            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  
            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 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:  According to the Assembly Appropriations  
          Committee, unknown state and local revenue loss as a result of  
          additional exclusions being used. 


          COMMENTS:  










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          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.


          2)CAEATFA's SUT Exclusion Program.  CAEATFA is allowed to  
            provide an 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  
            Committee), 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  








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            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.   


          3)CAEATFA's Application Process for SUT Exclusion.  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 an 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 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  








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            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. 


          4)Oversubscription:  What is the Problem?  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  
            CAEAFTA does not have the authority to utilize the unclaimed  
            awards.  Finally, CAEAFTA 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.  


          5)What Does this Bill Do?  This bill proposes to modify the  
            existing CAEFTA program to:  a) allow a rollover of  
            unallocated funds to the following calendar year, beginning  
            with the 2017 calendar year, and b) 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.  


          6)Construction Contracts: Definition of "Sale" or "Purchase."   
            In 2012, SB 1128 revised Revenue and Taxation Code Section  








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            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.   
            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  








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            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  
            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.  


          Analysis Prepared by:                                             
                          Oksana Jaffe / REV. & TAX. / (916) 319-2098  FN:  
          0003361












                                                                    AB 2334


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