BILL ANALYSIS Ó
AB 2518
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2518
(Gomez) - As Amended April 28, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exemption: nonprofit
corporation: building and construction supplies
SUMMARY: Establishes a partial sales and use tax (SUT)
exemption for building and construction supplies purchased for
use by specified nonprofit corporations. Specifically, this
bill:
1)Establishes a partial SUT exemption for building and
construction supplies, materials, equipment, and machinery,
and the parts thereof (collectively, "construction supplies"),
that are purchased for use by a nonprofit corporation that is
exempt from federal income taxation under Internal Revenue
Code Section 501(c)(3) and that has received a welfare
exemption under Revenue and Taxation Code (R&TC) Section
214.15 for construction and rehabilitation of properties in
California sold to "persons and families of low income".
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2)Defines "persons and families of low income" by reference to
Health and Safety Code Section 50093.
3)Provides that, notwithstanding any provision of the
Bradley-Burns Uniform Local SUT Law or the Transactions and
Use Tax Law, the exemption shall not apply with respect to any
tax levied by a county, city, or district pursuant to either
of those laws.
4)Provides that the exemption shall not apply with respect to
any tax levied pursuant to:
a) R&TC Section 6051.2 or 6201.2;
b) Section 35 and Section 36(f) of Article XIII of the
California Constitution; or,
c) R&TC Section 6051 or 6201 that is deposited in the State
Treasury to the credit of the Local Revenue Fund 2011.
5)Contains a standard recapture provision. Specifically, if a
purchaser certifies in writing to the seller that the
construction supplies purchased without tax will be used in a
manner entitling the seller to regard the gross receipts from
the sale as exempt, and within one year from the date of
purchase: (1) removes the construction supplies outside
California, (2) converts the construction supplies for use not
qualifying for the exemption, or (3) uses the construction
supplies in a manner not qualifying for the exemption, the
purchaser shall be liable for payment of the sales tax with
applicable interest, as specified.
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6)Takes immediate effect as a tax levy, but only becomes
operative on the first day of the first calendar quarter
commencing more than 180 days after this bill's effective
date.
7)Automatically sunsets the exemption five years after its
operative date.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state.
2)Imposes a complimentary use tax on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser; and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
3)Provides that property is within the property tax exemption
provided by Sections 4 and 5 of Article XIII of the California
Constitution if that property is owned and operated by a
nonprofit corporation, otherwise qualifying for the exemption
under R&TC Section 214, that is organized and operated for the
specific and primary purpose of building and rehabilitating
single or multifamily residences for sale at cost to
low-income families, with financing in the form of a zero
interest rate loan and without regard to religion, race,
national origin, or the sex of the head of household.
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FISCAL EFFECT: The BOE estimates annual General Fund (GF)
revenue losses of $175,000.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
As you already know, California is one of the most
expensive places to live.
Approximately 95 million American families suffer from
housing problems including high cost burdens, overcrowding,
and homelessness. One in three households spends more than
30 percent of their income on housing, and one in seven
spends more than 50 percent. Local governments deal with
overcrowding and congestion.
Employers struggle to attract and retain the labor force
that is so vital to their bottom line. Low- to
moderate-income working families work longer hours, endure
long commutes or cut back on basic necessities in order to
pay for housing.
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Affordable homeownership helps families, builds wealth, and
strengthens communities by providing substantial economic
benefits to the homeowner family, their neighborhood, and
the economy.
Several studies show potential benefits of homeownership to
be: (1) Better education outcomes for children; (2) Lower
community crime rates; (3) Less welfare dependency among
households; (4) More household participation in civic
affairs; (5) Better household health.
It is the Assemblymember's goal to increase construction of
affordable housing in California - AB 2518 is a modest step
toward this goal.
2)The BOE notes the following in its staff analysis of this
bill:
a) Non-qualifying uses of items : "The proposed exemption
will not apply if, within one year from the date of
purchase, the nonprofit corporation uses the building
supplies, equipment, and machinery in a manner not
qualifying for the exemption, converts the building
supplies, equipment, and machinery from an exempt use to a
non-qualifying use, or removes the qualifying building
supplies, equipment, and machinery from California. Similar
sales and use tax exemptions specify that the qualifying
items must be used primarily in the qualifying activity.
These exemptions define 'primarily' as 50 percent or more
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of the time. To administer this exemption consistent with
similar sales and use tax exemptions, BOE staff recommends
that the term 'primarily' be added to the bill. BOE staff
will work with the author's office to address this
concern."
b) Partial exemptions complicate administration :
"Currently, most sales and use tax exemptions are applied
to the total applicable sales and use tax. However,
several partial exemptions exist in which only the state
tax portion (5.25%) of the sales and use tax rate is
exempted, such as the farm equipment and teleproduction
equipment exemptions. These partial exemptions are
difficult for both retailers and the BOE, and complicate
return preparation and processing. Moreover, errors
attributable to these partial exemptions occur frequently.
This results in additional return processing workload for
the BOE."
3)This bill is supported by Habitat for Humanity, which notes
the following:
AB 2518 would exempt Habitat for Humanity from the state
portion of sales and use tax when purchasing building and
construction supplies, materials, equipment, machinery, and
related parts for construction of low-income housing.
Habitat for Humanity (Habitat) brings homeownership
opportunities to low income and very low income families
who are unable to obtain conventional home financing and
desire a permanent residence compared to a rental unit. In
most cases, prospective Habitat homeowner families make a
$500 down payment and they contribute 500 hours of "sweat
equity" on the construction of their home. Because Habitat
houses are built using donations of land, material, labor
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and government funding subsidies, like rental units, they
are kept affordable.
4)Committee staff comments:
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
b) How is a tax expenditure different from a direct
expenditure ? As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. Second, there is generally no control over the
amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) An overview of the SUT Law : California's SUT Law
imposes a sales tax on retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon a retailer's gross receipts from TPP sales in
California. The SUT Law also imposes a mirror "use tax" on
the storage, use, or other consumption of TPP purchased
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out-of-state and brought into California. The use tax is
imposed on the purchaser, and unless the purchaser pays the
use tax to an out-of-state retailer registered to collect
California's use tax, the purchaser remains liable for the
tax. The use tax is set at the same rate as the state's
sales tax and must generally be remitted to the BOE.
The SUT represents the state's second largest source of GF
revenues. Nevertheless, the past 60 years have seen a
dramatic reduction in the state's reliance on the SUT and a
corresponding increase in its reliance on personal income
tax revenues. In fiscal year (FY) 2014-15, SUT revenues
were estimated to comprise 23% of the state's GF revenues,
down from nearly 60% in FY 1950-51.
d) What accounts for the state's reduced reliance on SUT
revenues ? The SUT Law was enacted in a very different era.
In the 1930s, California's economy was largely dominated
by manufacturing, and residents mostly bought and sold
tangible goods. Thus, in establishing the base for a new
consumption tax, it made sense to impose the tax on sales
of TPP, defined as personal property that may be "seen,
weighed, measured, felt, or touched." Over the past 80
years, however, California's economy has seen dramatic
growth in the service and information sectors, resulting in
a significant erosion of the SUT base. For example, the
Commission on the 21st Century Economy noted that spending
on taxable goods represented 34.6% of personal income in
2008, down from 55.4% in 1980. As a result, tax experts
and economists from across the political spectrum argue
that California should expand its SUT base.
It could be argued that, while well-intentioned, additional
SUT exemptions further erode an already shrinking SUT base.
This, in turn, increases fiscal pressures to maintain or
even increase California's relatively high SUT rate. High
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rates arguably promote non-compliance and encourage
out-of-state purchases, placing California retailers at a
competitive disadvantage. High rates also risk impacting
consumer decision-making, which runs counter to widely
accepted principles of sound tax policy.
e) What would this bill do ? This bill would provide a
partial SUT exemption for construction supplies purchased
for use by specified nonprofit corporations exempt from
federal income taxation under IRC Section 501(c)(3).
Specifically, to receive the benefit of the exemption, the
nonprofit would need to have received a property tax
welfare exemption under R&TC Section 214.15. In addition,
the supplies would need to be used for constructing and
rehabilitating properties in California sold to low-income
families. The BOE notes that the exemption would apply
both to items consumed or used by the nonprofit to
construct the low-income housing and to items that are
physically incorporated into the housing.
f) To whom would this bill apply ? The BOE notes that,
according to the California Department of Housing and
Community Development and the California Housing Finance
Agency, there are only a few nonprofit organizations that
construct housing for sale to low-income families with
zero-percent financing. For example, the Habitat for
Humanity program constructs and rehabilitates homes for
sale to such families, and provides long-term, zero-percent
financing.
g) Defining the scope of eligible property : This bill's
current list of TPP potentially eligible for the SUT
exemption is remarkably broad. Specifically, the exemption
applies to "building and construction supplies, materials,
equipment, and machinery" along with the parts thereof.
Such items could include items actually incorporated into
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the housing, such as lumber, flooring, paint, tile, and
lighting fixtures. In addition, the terms could be read
expansively to include other TPP used to construct the
housing, but not actually incorporated into the housing,
such as electric generators, bulldozers, backhoe loaders,
cranes, and even pick-up trucks. If the author's intent is
to limit the exemption to materials actually incorporated
into low-income housing, appropriate amendments should be
taken to make this intent clear. In addition, the author
may wish to clarify whether computers and office supplies
used in administrative and management activities would also
qualify for the proposed exemption.
REGISTERED SUPPORT / OPPOSITION:
Support
Habitat for Humanity
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098
AB 2518
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