BILL ANALYSIS                                                                                                                                                                                                    

                                                                    AB 2673

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          Date of Hearing:  May 9, 2016


                           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  

             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  

          9)Provides that the tax credit shall apply for taxable years  
            beginning on or after January 1, 2016, and before January 1,  

          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.  


          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  

          3)The BOE notes the following in its staff analysis of this  

              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  

              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  

              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  

             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,  

             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  

               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  

               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".   




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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. 


          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


          California State Association of Counties


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          California Tax Reform Association

          Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)