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
          
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          |Version: May 27, 2016           |Policy Vote: GOV. & F. 5 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 1, 2016    |Consultant: Robert Ingenito     |
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          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.







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                 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.









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          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  








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               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  








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          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.











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          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.




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