BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 2334 |Hearing |6/22/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Mullin |Tax Levy: |Yes | |----------+---------------------------------+-----------+---------| |Version: |5/27/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- 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. AB 2334 (Mullin) 5/27/16 Page 2 of ? ------------------------------------------------------------- |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 AB 2334 (Mullin) 5/27/16 Page 3 of ? 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 AB 2334 (Mullin) 5/27/16 Page 4 of ? 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 AB 2334 (Mullin) 5/27/16 Page 5 of ? 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 AB 2334 (Mullin) 5/27/16 Page 6 of ? 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 AB 2334 (Mullin) 5/27/16 Page 7 of ? 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. AB 2334 (Mullin) 5/27/16 Page 8 of ? 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, AB 2334 (Mullin) 5/27/16 Page 9 of ? Proterra, Silicon Valley Leadership Group, TechNet. Opposition : None received. -- END --