BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 2334                          |Hearing    |6/22/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Mullin                           |Tax Levy:  |Yes      |
          |----------+---------------------------------+-----------+---------|
          |Version:  |5/27/16                          |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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            Sales and use taxes:  exclusion:  alternative energy financing



          Allows CAEATFA to carry forward to future years unallocated  
          sales and use tax exemptions from previous years, commencing in  
          the 2017 calendar year.   


           Background 

           State law imposes the sales tax on every retailer engaged in  
          business in this state that sells tangible personal property,  
          and requires them to collect the appropriate tax from the  
          purchase and remit the amount to the Board of Equalization  
          (BOE).  Sales tax applies whenever a retail sale is made, which  
          is basically any sale other than one for resale in the regular  
          course of business.  Unless the person pays the sales tax to the  
          retailer, he or she is liable for the use tax, which is imposed  
          on any person consuming tangible personal property in the state.  
           The use tax rate is the same rate as the sales tax rate, and  
          must be remitted on or before the last day of the month  
          following the quarterly period in which the person made the  
          purchase.  The current rate is 7.50%, but beginning January 1,  
          2017, the sales and use tax rate decreases to 7.25% (Proposition  
          30, 2012.  The rate breakdown is detailed below).  Additionally,  
          cities and counties may increase the sales and use tax rate up  
          to 2% for either specific or general purposes pursuant to the  
          California Constitution's vote requirements. 








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                   ------------------------------------------------------------- 
                  |Rate   |Jurisdiction        |Purpose/Authority               |
                  |-------+--------------------+--------------------------------|
                  |3.9375%|State (General      |State general purposes          |
                  |       |Fund)               |                                |
                  |-------+--------------------+--------------------------------|
                  |1.0625%|Local Revenue Fund  |Realignment of local public     |
                  |       |2011                |safety services                 |
                  |       |                    |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |0.50%  |State (Local        |Local governments to fund       |
                  |       |Revenue Fund)       |health and welfare programs     |
                  |-------+--------------------+--------------------------------|
                  |0.50%  |State (Local Public |Local governments to fund       |
                  |       |Safety Fund)        |public safety services          |
                  |-------+--------------------+--------------------------------|
                  |1.25%  |Local (City/County) |City and county general         |
                  |       |1.00% City and      |operations.                     |
                  |       |County              |                                |
                  |       |0.25% County        |Dedicated to county             |
                  |       |                    |transportation purposes         |
                  |-------+--------------------+--------------------------------|
                  |7.25%  |Total Statewide     |                                |
                  |       |Rate                |                                |
                   ------------------------------------------------------------- 
                  
          Many items are fully exempted from the sales and use tax in this  
          state (prescription drugs, food, poultry litter), while others  
          are exempted from the state sales tax, but not the local share,  
          such as farm equipment and machinery, diesel fuel used for  
          farming and food processing, teleproduction and postproduction  
          equipment, timber harvesting equipment and machinery, and  
          racehorse breeding stock.

          Additionally, when construction contractors purchase products to  
          improve real property, state law generally considers them as the  
          consumer of materials, such as electrical wiring, concrete, and  
          other items, for sales tax purposes. As such, the contractor  
          pays tax on materials they use in the project, and incorporate  
          the tax into the contracted price. However, state law treats  
          construction contractors as a retailer for fixtures, which are  
          accessories to a structure that do not lose their identity when  








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          installer, so the contractor must collect and remit the sales  
          tax based on the price he or she charges for the fixture.

          Economic Development Initiative.  In 2013, the Legislature  
          enacted AB 93 (Committee on Budget) and SB 90 (Committee on  
          Budget and Fiscal Review), also known as the "Economic  
          Development Initiative," which reformed California's economic  
          development policies by eliminating enterprise zones and other  
          geographically-targeted economic development areas, and instead  
          allowed three new tax benefits:

                 Tax credits for wages paid by taxpayers to qualified  
               employees within former enterprise zones, and other areas  
               that suffer from high levels of poverty and unemployment.   
               The credit lasts from the 2014 taxable year until the 2019  
               taxable year.
                 The California Competes Tax Credit, where the California  
               Competes Tax Credit Committee, also created by the bill,  
               can award various tax credits up to an annually capped  
               amount to taxpayers who apply.  The Committee is comprised  
               of the Treasurer, the Director of Finance, the Director of  
               the Governor's Office of Business and Economic Development  
               (GO-BIZ), one appointee of the Speaker of the Assembly, and  
               one appointee from the Senate Committee on Rules.
                 A state-only (3.9375%) sales and use tax exemption on  
               purchases of manufacturing equipment made by taxpayers  
               within specific North American Industrial Classification  
               System codes, capped at $200 million annually per taxpayer,  
               effective July 1, 2014, and ending July 1, 2022.  The  
               exemption largely superseded the SB 71 and SB 1128  
               programs, as they applied to almost all the same taxpayers.  
                Instead of applying to CAEATFA, taxpayers simply print a  
               resale certificate from BOE's website, and present it to  
               the retailer to purchase the property sales-tax free.   
          
          CAEATFA.  Housed in the office of the State Treasurer, the  
          California Alternative Energy and Advanced Transportation  
          Financing Authority (CAEATFA) provides financial assistance  
          through conduit revenue bonds, loan guarantees, loan loss  
          reserves and a sales and use tax exemption for facilities that  
          use alternative energy sources and technologies or engage in  
          advanced manufacturing.  CAEATFA's board, composed of the  
          Treasurer, Controller, Director of Finance, Chairperson of the  
          Energy Commission, and President of the Public Utilities  








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          Commission, decides which projects to assist.  In addition to  
          its sales and use tax program, CAEATFA administers other  
          programs, including:

                 A $10 million loan loss reserve program that directs the  
               state to reimburse the original mortgage lender for the  
               costs associated with the Property Assessed Clean Energy  
               program assessments during a foreclosure (SB 96, Committee  
               on Budget and Fiscal Review, 2013).  
                 A $25 million loan loss reserve program to backstop  
               loans made by participating financial institutions for  
               energy efficiency improvements and distributed generation  
               technology (ABx1 14, Skinner, 2011).

          When the Legislature created CAEATFA in 1980, it provided that  
          both the state and local shares of the sales and use tax didn't  
          apply to its purchases of tangible personal property.  However,  
          CAEATFA didn't do much until 2008, when Governor Arnold  
          Schwarzenegger and State Treasurer Bill Lockyer announced that  
          CAEATFA would use this authority to grant a state and local  
          sales and use tax exclusion for normally taxable manufacturing  
          equipment purchased by Tesla Motors under a sale-leaseback  
          agreement.  Subsequently, the Legislature directed CAEATFA to  
          administer a state and local sales and use tax exclusions for  
          manufacturers of renewable technology, subject to an application  
          and evaluation process (SB 71, Padilla, 2010), which was soon  
          after expanded to advanced manufacturing (SB 1128, Padilla,  
          2012).  While CAEATFA's blanket sales and use tax exemption  
          authority doesn't have a sunset, the Legislature placed a July  
          1, 2021, sunset on the renewable energy production program, and  
          last year, extended to the same date the prior July 1, 2016,  
          sunset on the advanced manufacturing program (AB 1269, Dababneh,  
          2015).  The Legislature also expanded the program last year to  
          include projects that utilize recycled feedstock either for  
          reuse or in producing another product or soil amendment (AB 199,  
          Eggman).   

          CAEATFA can allocate exclusions up to $100 million annually to  
          successful applicants across all programs; however, CAEATFA  
          evaluates all applicants to determine whether the benefits  
          received by the state will outweigh forgone revenue, and can  
          only approve applications for projects that produce net fiscal  
          and environmental benefits for the state.  Once the exclusion  
          has been granted, applicants are allowed three years to use the  








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          award, but can request extensions.   CAEATFA can neither  
          recapture for future allocation any amounts awarded in previous  
          years but not yet utilized, nor carry forward unallocated  
          authorizations from previous years, unlike other authorities in  
          the Treasurer's Office.  CAEATFA had approved more than $400  
          million in exclusions; however they could've allocated $211 more  
          if authorized to carry forward amounts from previous years.  

          In December, 2015, CAEATFA suspended acceptance of new  
          applications due to oversubscription, and to develop of the  
          regulations to implement AB 199.  Tesla applied for two projects  
          for a total of $145 million, along with two other large  
          applicants: Atieva ($44 million), and Gilead Sciences, Inc.  
          ($15.8 million).  Seeking authorization to be able to grant  
          additional exclusions to applicants using previously allocated  
          but unclaimed tax benefits, CAEATFA wants to modify the current  
          $100 million cap.  CAEATFA also wants to include sales tax  
          imposed as part of any construction contracts with approved  
          applicants as part of the exclusion.


           Proposed Law

           Assembly Bill 2334 provides that CAEATFA can allocate any  
          amounts not granted, or granted and not used, from the previous  
          calendar year, beginning in the 2017 calendar year.  The measure  
          also expands CAEATFA's sales and use tax exclusion to include  
          any lease or transfer of title of tangible personal property  
          constituting any project 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.




           State Revenue Impact

           According to BOE, AB 2334 has an unknown impact on state  
          revenues.


           Comments









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           1.  Purpose of the bill  .  According to the author, "AB 2334  
          allows for rollover of unused funds from previous years of the  
          California Alternative Energy and Advanced Transportation  
          Authority (CAEATFA) sales and use tax exclusion (STE), currently  
          capped at $100 million. Furthermore, AB 2334 streamlines the  
          process by allowing contractors designated by the participating  
          party to claim the STE.  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.   Priorities  .  Interest in CAEATFA's sales and use tax  
          exclusion is highly cyclical, depending on the general business  
          cycle, as well as specific interest from the types of firms that  
          qualify for CAEATFA's renewable energy technology and advanced  
          manufacturing programs.  As a result, CAEATFA's tax exemption  
          programs were undersubscribed from 2010 to 2014, but in 2015,  
          CAEATFA received applications for exemptions in amounts which  
          exceeded the authorized $100 million.  To respond to higher  
          demand, AB 2334 as introduced would have increased the annual  
          cap to $475 million in 2016, and $250 million from 2017 to 2020,  
          while also authorizing future awards of amounts previously  
          unallocated.  However, recent amendments deleted the increase in  
          the cap, and only allow CAEATFA to award unallocated exclusions  
          from the prior year starting in 2017, which likely will be zero  
          because of the current oversubscription.  While any unallocated  
          exclusions likely result in less fiscal losses, CAEATFA can only  
          approve applications for which it finds that the net  
          environmental and economic benefits.  The Committee may wish to  
          consider its desired level of authority for CAEATFA's tax  
          programs, and whether it should be allowed to allocate amounts  
          today that weren't claimed in the past.

          3.   Review  .  In its December, 2014, report to the Legislature  
          regarding both the SB 71 and 1128 programs, CAEATFA states that  
          up to that time, it had approved 76 projects for a total of $273  
          million of foregone revenue; however, only 63 applicants  
          eventually purchased $43.3 million of equipment because  
          applicants build out projects over a course of years, and the  
          revenue effect doesn't occur until the applicant purchases the  
          property.  CAEATFA adds that most of the unspent allocation  
          comes from a few, larger, more recent applicants, with only two  
          comprising one-third of the unspent amount.  Smaller projects of  
          less than $1 million constitute the majority of granted  








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          applications and foregone revenue.  CAEATFA projected net  
          environmental benefits of $82 million, economic benefits of $299  
          million, with a fiscal cost of $244 million, for a total net  
          benefit of $137 million realized over the expected useful life  
          of the equipment, which is about 5 to 29 years.  As part of the  
          report, CAEATFA recommends extending the advanced manufacturing  
          program to provide businesses with stability and a sufficient  
          planning horizon, which the Legislature did last year.  CAEATFA  
          also recommended removing the $100 million cap on the combined  
          program as a signal to green businesses and investors that the  
          exemption would be available for large projects choosing to  
          locate in California.  Additionally, CAEATFA must report on the  
          sales and use tax exemption program by January 1, 2017,  
          including the number of jobs created, the costs of each job, as  
          well as its annual salary, and consider a dynamic analysis of  
          the economic output of the state without the exemption by  
          January 1, 2017.  



































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          4.   Hard times .  Much of CAEATFA's operating budget comes from a  
          loan from the Renewable Resource Trust Fund, which it repays  
          from application fees.  In the past, CAEATFA stated that it had  
          "erratic application volume and program activity" due to the  
          economic recession, localized industry trends such as the  
          disruption of the solar manufacturing market, and the enactment  
          of the general sales and use tax exclusion.  CAETFA's fee  
          schedule imposes a fee of .0005 of the total amount of  
          anticipated qualified machinery in the application, not to  
          exceed $10,000 per applicant, and .004 of the machinery  
          purchases, not to exceed $350,000.  As application volume picks  
          up, CAEATFA is more likely to be able to repay its loan, even  
          more so if it could award previously unallocated amounts.  

          5.   Construction  .  Current law only exempts transfers of title  
          of property to the successful applicant for the CAEATFA  
          exclusion, so only the applicant may issue a certificate to the  
          retailers, but not its construction contractors and  
          subcontractors performing the work on the eligible project.   
          While parties can structure contracts to allow contractors to  
          apply the exemption in certain circumstances, CAEATFA argues  
          that doing so is unnecessarily complicated and cumbersome.  To  
          simplify the process, this bill proposes to allow any contractor  
          to claim the exemption when the contractor purchases property  
          for use in the performance of a construction contract for the  
          participating party; however, this treatment only applies if the  
          participating party will use the property as an integral part of  
          the approved project.  


           Assembly Actions

           Assembly Revenue and Taxation                9-0

          Assembly Appropriations                      20-0
          Assembly Floor                               78-0

           Support and  
          Opposition   (>)


           Support  :  State Treasurer John Chiang, Californians Against  
          Waste, California Manufacturers and Technology Association,  








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          Proterra, Silicon Valley Leadership Group, TechNet.

           Opposition  :  None received.



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