BILL ANALYSIS Ó
AB 2334
Page 1
ASSEMBLY THIRD READING
AB
2334 (Mullin and Ting)
As Amended May 27, 2016
2/3 vote. Tax levy
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|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 | |
| | |Hernández, 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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