BILL ANALYSIS Ó
AB 2673
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2673
(Harper) - As Amended April 26, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use tax exemption: income tax credits:
hydrogen refueling station equipment
SUMMARY: Establishes a sales and use tax (SUT) exemption for
"hydrogen refueling station equipment" sold to a "qualified
grant recipient". Specifically, this bill:
1)Provides a SUT exemption for:
a) The gross receipts from the sale of "hydrogen refueling
station equipment" to a "qualified grant recipient"; and,
b) The storage, use, or other consumption in this state of
"hydrogen refueling station equipment" by a "qualified
grant recipient".
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2)Provides that the SUT exemption shall apply on and after
January 1, 2017, and before January 1, 2030.
3)Defines "hydrogen refueling station equipment" as any of the
following:
a) Equipment, including machinery, devices, contrivances,
and component, repair, or replacement parts, whether
purchased separately or in conjunction with a complete
machine and regardless of whether the equipment or
component parts are assembled by the grant recipient or
another party, to be located at a "hydrogen refueling
station" within this state and used exclusively for the
distribution, dispensing, storage, or production of
hydrogen fuel for "fuel cell" electric vehicles, including,
but not limited to, pressurized storage, compression,
pre-cooling, and pumping of hydrogen fuel;
b) Personal property that is software or software services,
regardless of location, and computer, computer-type, or
data processing hardware or hardware services, regardless
of location, that is used exclusively for the distribution,
dispensing, storage, or production of hydrogen fuel at a
"hydrogen refueling station" for "fuel cell" electric
vehicles; and,
c) Any other personal property required to operate,
control, regulate, or maintain the hydrogen refueling
station equipment set forth above.
4)Defines a "hydrogen refueling station" as any motor vehicle
fueling station which provides hydrogen fuel, either
exclusively or concurrently with other motor vehicle fuels,
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for use by "fuel cell" electric vehicles.
5)Defines a "fuel cell" as a device that directly or indirectly
creates electricity through an electrochemical process using
hydrogen, or hydrogen-rich, fuel and oxygen or another
oxidizing agent.
6)Defines a "qualified grant recipient" as a person who has
received a grant pursuant to Health and Safety Code (H&SC)
Section 44272 for the development of hydrogen refueling
stations within this state.
7)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any SUT revenues lost as a
result of this exemption.
8)Provides a tax credit, under both the Personal Income Tax
(PIT) Law and the Corporation Tax (CT) Law, equal to the sum
of sales tax reimbursements and use taxes previously paid
during the period from January 1, 2014, to January 1, 2017, by
the qualified grant recipient for hydrogen refueling station
equipment.
9)Provides that the tax credit shall apply for taxable years
beginning on or after January 1, 2016, and before January 1,
2017.
10)Provides that, for purposes of the credit, the terms
"qualified grant recipient" and "hydrogen refueling station
equipment" have the same meanings as set forth above.
11)Provides that, in the case of a pass-thru entity, a credit
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shall be allowed to the pass-thru entity and passed through to
the partners or shareholders as specified. The term
"pass-thru entity" is defined to mean any partnership for
purposes of the CT Law credit and any partnership or "S"
corporation for the PIT Law credit.
12)Provides that if the credit amount exceeds the taxpayer's tax
liability, the excess credit amount may be carried over and
added to the credit in the succeeding taxable years, if
necessary, until the credit is exhausted.
13)Authorizes the Franchise Tax Board (FTB) to prescribe rules,
guidelines, or procedures necessary or appropriate to carry
out administration of the credit.
14)Provides that Revenue and Taxation Code (R&TC) Section 41
shall not apply to this credit.
15)Repeals the tax credit provisions on December 1, 2017.
16)Takes immediate effect as a tax levy.
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
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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)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to encourage
socially beneficial behavior or to provide relief to taxpayers
who incur specified expenses.
4)Requires any bill authorizing a new credit to contain all of
the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve;
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives. The requirements shall include the specific
data and baseline measurements to be collected and remitted
in each year the credit is in effect, for the Legislature
to measure the change in performance indicators, and the
specific taxpayers, state agencies, or other entities
required to collect and remit data. (R&TC Section 41.)
5)Establishes the Alternative and Renewable Fuel and Vehicle
Technology Program (Program) administered by the State Energy
Resources Conservation and Development Commission
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(Commission). The Program provides, upon appropriation by the
Legislature, competitive grants, revolving loans, loan
guarantees, loans, or other appropriate funding measures to
specified entities to develop and deploy innovative
technologies that transform California's fuel and vehicle
types to help attain the state's climate change policies.
State law provides that the Program's emphasis shall be to
develop and deploy technology and alternative and renewable
fuels in the marketplace, without adopting any one preferred
fuel or technology. (H&SC Section 44272)
FISCAL EFFECT: The BOE estimates that this bill's SUT
provisions would reduce revenues by $59,769 annually. The FTB
estimates that the credit provisions of this bill would reduce
General Fund (GF) revenues by $4.5 million in fiscal year (FY)
2016-17, by $0.9 million in FY 2017-18, and by $0.5 million in
FY 2018-19.
COMMENTS:
1)This bill is supported by the Los Angeles County Economic
Development Corporation, which notes:
By providing a sales and use tax exemption on the sale of
hydrogen refueling station equipment purchased by a
recipient of an Alternative and Renewable Fuel and Vehicle
Technology Program grant, AB 2673 resolves a
counterintuitive glitch in the current system, whereby the
California Energy Commission awards grants to incentivize
hydrogen refueling station development, yet grant
recipients must, at the same time, pay sales and use taxes
to purchase this needed hydrogen refueling equipment.
Moreover, AB 2673 also provides a one-time income tax
credit that would allow qualified grant recipients to
recover the amount of sales and use taxes previously paid,
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during the period from January 1, 2014 to January 1, 2017,
the bill's effective date, for past purchases of hydrogen
refueling station equipment.
We believe that by undoing this "glitch" to reflect the
true intent of the Alternative and Renewable Fuel and
Vehicle Technology Program, [this] bill will encourage the
installation of a wider network of hydrogen refueling
stations that are critical for the successful roll-out and
adoption of hydrogen FCEVs in California.
2)This bill is opposed by the California Tax Reform Association,
which notes the following:
We question the effectiveness of singling out a particular
technology for special tax treatment. In particular, the
state makes many investments in alternative energy through
utility rates, cap-and-trade revenues, and fees and
mandates, as an attempt to transform the transportation
sector. To the extent that the state determines that tax
credits are more effective than direct investments, the
general fund should be reimbursed from cap-and-trade
revenues for the tax-exempt purchase of these fuel
stations.
3)The BOE notes the following in its staff analysis of this
bill:
a) Effect of the bill : "This bill would enable qualified
grant recipients to purchase, use, or consume hydrogen
refueling stations equipment, as defined, without paying
sales or use tax from January 1, 2017, to January 1, 2030."
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b) The Commission's grant program has a different sunset
date than the sales and use tax exemption : "The sunset
date for the grant program is January 1, 2024, while the
sunset date for this bill is January 1, 2030. The later
sales tax exemption sunset date allows grant recipients
additional time to utilize the sales and use tax exemption
to build hydrogen refueling stations."
c) Exemption also applies to local and district taxes :
"The proposed sales and use tax exemption for recipients of
the Commission's grant program includes all taxes imposed
at the place of sale. The total sales and use tax rate
includes local taxes and voter-approved city and county
district taxes. This exemption applies to the entire sales
and use tax rate resulting in revenue loss for cities and
counties."
d) The exemption is not transferable to construction
contractor : "The proposed law exempts the sale of, and
storage, use, or other consumption in this state of,
hydrogen refueling station equipment, as defined, to
qualified grant recipients, as defined. The exemption in
the proposed law only applies when title to the materials
and fixtures transfers to the 'qualified grant recipients.'
Construction contractors hired to work on behalf of a
qualified grant recipient would not benefit from the
exemption with regards to materials and fixtures they
consume."
e) List of qualified participants : "In order to properly
identify taxpayers qualified to use this new exemption, a
report or publicly available list of "qualified grant
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recipients" should be provided to the BOE."
4)The FTB notes the following in its staff analysis of this
bill:
a) "This bill would allow the credit for taxes 'previously
paid.' Typically, credits are allowed for amounts that are
either 'paid or incurred,' thus providing for both
cash-basis and accrual-basis accounting methods."
b) "The end date for the tax credit should be 'December 31,
2016,' rather than 'January 1, 2017,' as the sales and use
tax exemption that would be added by this bill would begin
January 1, 2017. Thus, it would be unlikely that a credit
could be claimed for sales and use taxes paid on January 1,
2017."
c) "This bill would provide that a credit allowed to a
pass-thru entity would be passed through as provided under
existing law. The bill should be amended to eliminate
unnecessary language."
5)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).
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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) This bill's SUT exemption :
i) 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 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 PIT revenues.
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In FY 2014-15, SUT revenues were estimated to comprise
23% of the state's GF revenues, down from nearly 60% in
FY 1950-51.
ii) 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 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.
iii) What would this bill do ? This bill would establish
a SUT exemption for hydrogen refueling station equipment
sold to a qualified grant recipient. This bill defines a
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"qualified grant recipient" as a person who has received
a grant pursuant to H&SC Section 44272 for the
development of hydrogen refueling stations within
California. The SUT exemption would apply for a period
of 13 years - namely, on and after January 1, 2017, and
before January 1, 2030.
iv) An emerging technology : Proponents note that fuel
cell electric vehicles (FCEVs), powered by hydrogen fuel,
are just now being introduced in mass volumes by
automakers, including Toyota, Honda, and Hyundai.
Additional automakers, such as General Motors, Audi, BMW,
and Mercedes-Benz, are reportedly preparing for market
entry. While these vehicles are being commercialized
throughout the world, California's mandate for
zero-emission vehicles makes the state one of the focal
points for the initial introduction and rollout of this
new technology. Proponents note that FCEVs can be two to
three times more efficient than conventional vehicles.
Moreover, FCEVs are fueled with hydrogen gas, which is
stored in the vehicle; they emit no pollutants - only
water and heat.
v) Current state support : AB 8 (Perea), Chapter 401,
Statutes of 2013, established $20 million in annual
funding for hydrogen refueling stations through grants
administered by the Commission. The funding is available
until there are at least 100 operational and publicly
available hydrogen refueling stations in California, or
until January 1, 2024.
vi) Potential amendments : The author and Committee may
wish to consider the following potential amendments to
this bill:
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(1) A shortened sunset date : This bill's SUT
exemption would apply for a period of 13 years. This
Committee, however, has a longstanding policy favoring
the inclusion of five-year sunset dates. This allows
the Legislature to revisit tax expenditure programs in
a timely fashion, to assess both efficacy and cost.
The Committee may wish to consider shortening this
bill's SUT exemption to five years. In addition,
actual repeal language should be included to ensure
the code section does not remain after the exemption's
operative period.
(2) Defining the scope of the benefit : This bill
provides an expansive definition of "hydrogen
refueling station equipment" qualifying for the
exemption. For example, the exemption covers
equipment to be located at a hydrogen refueling
station within this state. The exemption also covers
software and software services used exclusively for
the distribution of hydrogen fuel at a hydrogen
refueling station. This second category of exempt
property, however, is not limited to refueling
stations located in California. If this is contrary
to the author's intent, appropriate amendments should
be taken. In addition, most services are already
exempt from taxation under the SUT Law, given that the
law applies to sales of TPP. Thus, it is not entirely
clear why such services are enumerated in the list of
items eligible for exemption.
(3) Including a recapture provision : Often, SUT
exemptions that are contingent on a particular use of
property contain "recapture provisions" that allow the
state to collect SUT if the exempt property is
subsequently used in a manner not qualifying for the
exemption. The Committee may wish to consider whether
it would be useful to include an appropriate recapture
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provision for this bill.
d) The PIT Law and CT Law credit provisions : In addition
to providing a SUT exemption, this bill would allow
qualified grant recipients an income tax credit for SUT
amounts previously paid on hydrogen refueling station
equipment. Specifically, the credit would be available for
taxable years beginning on or after January 1, 2016, and
before January 1, 2017, for SUT amounts paid during the
period from January 1, 2014, to January 1, 2017.
This bill's credit provisions raise a number of policy
concerns that this Committee may wish to consider. First,
credits are typically provided as a matter of Legislative
grace to encourage some future, socially beneficial
behavior on the part of the taxpayer. In this case,
however, the credit appears designed to compensative grant
recipients for SUT amounts paid in prior years. In
addition, credits are typically structured so that the
credit amount is equal to a specified percentage of
qualifying costs paid or incurred by a taxpayer. This
ensures that there is "buy-in" from the taxpayer, and that
the state is not subsidizing the entire cost of certain
taxpayer expenses. This bill, in contrast, provides a
credit equal to all SUT expenses paid during the period
from January 1, 2014 to January 1, 2017. As far as
Committee staff is aware, such a credit would be
unprecedented.
Beyond these broad policy concerns, the FTB has identified
a host of implementation and technical concerns with this
bill's tax credit provisions. For example, this bill uses
undefined terms like "sum of sales tax reimbursements".
The lack of definitional guidance could lead to disputes
with taxpayers and would complicate administration of this
credit. In addition, the FTB notes that it is unclear how
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it would verify that a taxpayer is a qualified grant
recipient or determine SUT expenses attributable to the
taxpayer. Finally, this bill contains an unlimited
carry-forward period. Consequently, the FTB would be
required to retain the carryover on the tax forms
indefinitely. Recent credits have been enacted with a
limited carryover period, because experience demonstrates
that most credits are exhausted within eight years of being
earned. FTB notes that it is available to work on these
and other concerns subsequently identified.
e) Suggested technical amendments : Committee staff
suggests adoption of the following technical amendments:
i) On page 3, in line 6, strike "which" and insert
"that";
ii) On page 3, in line 15, insert "qualified" before
"grant recipient";
iii) On page 3, in line 21, strike "Personal property"
and insert "Tangible personal property"; and,
iv) On page 3, in line 27, insert "tangible" before
"personal property".
REGISTERED SUPPORT / OPPOSITION:
Support
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Air Products
American Lung Association of California
California Hydrogen Business Council
City of Santa Monica
Clean Power Campaign
Energy Independence Now
First Element Fuel
Fuel Cell and Hydrogen Energy Association
G&M Oil Company, Inc.
H2 Logic
Hillside Motor Fuels, Inc.
Honda
HTEC Hydrogen Technology & Energy Corporation
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Hydrogenics Corporation
ITM Power
Linde North America
Los Angeles County Economic Development Corporation
Monterey Bay Air Resources District
National Fuel Cell Research Center
Powertech Labs Inc.
StratosFuel, Inc.
United Hydrogen
US Hybrid
Opposition
California State Association of Counties
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California Tax Reform Association
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098