BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 2334 (Mullin) - Sales and use taxes: exclusion: alternative energy financing ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 27, 2016 |Policy Vote: GOV. & F. 5 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 1, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 2334 would allow the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) to carry forward to future years unallocated sales and use tax exemptions from previous years. Fiscal Impact: The Board of Equalization would incur minor and absorbable expenses to notify taxpayers, modify its internet site and publications, and answer inquiries. Unknown use of the SUT exclusion as a result of rolling forward unallocated exclusion amounts for an additional year. The magnitude is unknown, but potential in the low hundreds of millions of dollars. AB 2334 (Mullin) Page 1 of ? CAEATFA would require one position and incur additional ongoing costs of $132,000 (special fund) related to additional application activity. Background: Except where a specific exemption or exclusion is provided, current law imposes the SUT on all retailers for the privilege of selling tangible personal property (TPP) at retail in California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer. After the State collects SUT revenue ($48 billion in 2013-14), it allocates the money to various state and local funds. Roughly half-collected from an approximately 3.9 percent rate-goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs-an approximately 1.1 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates-known as Transactions and Use Taxes (TUTs)-and a small portion of these funds are used for general purposes. As of January 1, 2017, the average statewide SUT rate will be 8.21 percent. State law fully exempts many items from SUT (such as prescription drugs, food, electricity, and poultry litter), while other items 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. Partial SUT exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently, resulting in additional return processing workload for BOE. AB 2334 (Mullin) Page 2 of ? 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 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 percent) SUT 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 AB 2334 (Mullin) Page 3 of ? exemption largely superseded existing 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 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 decides which projects to assist. In addition to its SUT 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 AB 2334 (Mullin) Page 4 of ? 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 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. AB 2334 (Mullin) Page 5 of ? Proposed Law: This bill would provide 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 would expand CAEATFA's SUT 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. Related Legislation: AB 1683 (Eggman) allows the unallocated portion of the current $100 million cap in one calendar year to be added to the following calendar year's cap. The bill was held under submission on the Suspense File of the the Assembly Appropriations Committee. Staff Comments: Between November 2010 and January 1, 2016, CAEATFA approved tax exclusions of about $455 million, but only $92 million in tax has been claimed. -- END --