BILL ANALYSIS Ó
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: | |
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|Author: |Mullin |Tax Levy: |Yes |
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|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 | |
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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
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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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