BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2675


                                                                    Page  1





          Date of Hearing:  May 9, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          AB 2675  
          (Chiu) - As Amended May 2, 2016


          Majority vote.  Tax levy.  Fiscal committee.


          SUBJECT:  Sales and use tax exclusion:  income taxes credits:   
          electric vehicle infrastructure


          SUMMARY:  Provides a partial Sales and Use Tax (SUT) Law  
          exclusion and tax credit under the Personal Income Tax (PIT) Law  
          and the Corporation Tax (CT) Law for electric vehicle (EV)  
          infrastructure at a "qualified dwelling."  Specifically, this  
          bill:  


          1)Provides, between January 1, 2017 and January 1, 2020, a  
            partial exclusion under the SUT Law for 10% of the gross  
            receipts or sales price of EV infrastructure purchased for use  
            at a "qualified dwelling" in California.  For purposes of the  
            SUT exclusion, this bill:


             a)   Limits the exclusion to the first $400,000 of gross  
               receipts or sales price; and,








                                                                    AB 2675


                                                                    Page  2







             b)   Specifies that the exclusion does not apply to local SUT  
               imposed pursuant to the Bradley-Burns Uniform Local SUT Law  
               (Bradley-Burns) or the Transactions and Use Tax (TUT) Law.


          2)Allows a credit under the PIT Law and the CT Law, for taxable  
            years beginning on or after January 1, 2017 and before January  
            1, 2020, in an amount equal to 10% of the amount paid by a  
            taxpayer for EV infrastructure during the taxable year for use  
            at a "qualified dwelling," not to exceed $2,500.  For purposes  
            of the PIT and CT credit, this bill:


             a)   Allows the credit to be carried over for four years, or  
               until the credit is exhausted;


             b)   Authorizes the Franchise Tax Board (FTB) to prescribe  
               rules, guidelines, or procedures necessary or appropriate  
               to carry out the purposes of the credit;


             c)   Provides that Revenue and Taxation Code (R&TC) Section  
               41 does not apply to the credit; and, 


             d)   Repeals the credit on December 1, 2020.


          3)Defines "EV infrastructure" as structures, machinery, and  
            equipment necessary to support an EV, including a battery  
            charging station, battery exchange station, and rapid charging  
            station.


          4)Defines a "battery charging station" as any level of EV supply  
            equipment station built in compliance with the 2013 California  








                                                                    AB 2675


                                                                    Page  3





            Electrical Code that delivers electricity from a source  
            outside to inside an EV.


          5)Defines a "rapid charging station" as an industrial grade  
            electrical outlet that allows for faster charging of EV  
            batteries through higher power levels and meets or exceeds  
            existing regulations at the time of purchase.


          6)Defines a "qualified dwelling" as a multiunit dwelling, which  
            includes a multifamily residence or multifamily dwelling unit,  
            mobilehome or manufactured home located at a mobilehome park,  
            duplex, townhome, apartment, and condominium.


          7)Takes immediate effect as a tax levy.


          EXISTING FEDERAL LAW provides, through December 31, 2016, a tax  
          credit for alternative fuel vehicle refueling property that  
          includes charging stations for electric vehicles.  The credit is  
          calculated as 30% of the cost of qualified property placed in  
          service during the taxable year, may not exceed $30,000 for  
          business or investment use property and $1,000 for consumer  
          property, and is subject to recapture if the property no longer  
          qualifies for the credit within three years of being placed in  
          service.


          EXISTING STATE LAW:


          1)Establishes the Alternative and Renewable Fuel and Vehicle  
            Technology Program (ARFVTP) which requires the California  
            Energy Commission (CEC) to fund projects that develop and  
            deploy technologies sand alternative and renewable fuels in  
            the marketplace to help meet the state's climate change goals  
            including, but not limited to, expanding alternative fueling  








                                                                    AB 2675


                                                                    Page  4





            infrastructure such as EV charging systems.  (Health & Safety  
            Code Section 44272)  


          2)Imposes a SUT on the sale of, or the storage, use, or other  
            consumption of, tangible personal property (TPP), unless  
            specifically exempted.


          3)Provides that the SUT must be computed based on the sales  
            price or gross receipts of the TPP, unless specifically  
            excluded.


          4)Specifies that a portion of the SUT funds city and county  
            governments, and authorizes cities and counties to impose  
            additional TUTs.


          5)Allows various tax credits under the PIT Law and CT Law.   
            These credits are generally designed to encourage socially  
            beneficial behavior or to provide relief to taxpayers who  
            incur specified expenses.


          6)Applies performance measurement standards to any new tax  
            credit under either the PIT Law or the CT Law if enacted by a  
            bill introduced on or after January 1, 2015.  Specifically,  
            existing law requires 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  








                                                                    AB 2675


                                                                    Page  5





               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)

          FISCAL EFFECT:  Pending.  Regarding the SUT provisions, the  
          State Board of Equalization (BOE) fiscal estimate is currently  
          pending.   


          Regarding the PIT Law and CT Law provisions, the FTB estimated  
          that a previous version of this bill applying to all EV  
          infrastructure installations, not just those limited to  
          multiunit dwellings, would have resulted in General Fund (GF)  
          revenue losses of $1.1 million in fiscal year (FY) 2016-17, $2.3  
          million in FY 2017-18, and $2.6 million in FY 2018-19.  The  
          scope of this bill has been slightly narrowed, so the revenue  
          impact should be slightly reduced but still substantial.


          COMMENTS:  


           1)Author's Statement :  The author has provided the following  
            statement in support of this bill:


               California is at the forefront of improving our air  
               quality, battling climate change and reducing greenhouse  
               gas emissions.  Many California regions also suffer from  
               the worst air quality in the country resulting in  
               significant health cost to individuals and system of health  
               care.










                                                                    AB 2675


                                                                    Page  6





               To achieve the desired air quality and greenhouse gas  
               emission reductions that policy makers are striving to  
               reach will require policies that promote zero-emission  
               vehicles (ZEVs).  In 2012, Governor Brown issued an  
               Executive Order directing relevant state agencies to  
               establish benchmarks to help the State's zero-emission  
               vehicle infrastructure support 1.5 million [ZEVs] by 2025.   
               Without the investment in EV infrastructure California may  
               never reach this goal.


               Investing in EV charging infrastructure will address the  
               most common infrastructure concerns raised by customers of  
               reliability, range anxiety, and length of commute disparity  
               between gas and [ZEVs].


           2)Arguments in Support  :  Proponents of this bill state that  
            despite working with state agencies to "establish the nation's  
            first set of 'EV-ready' building standards for commercial and  
            residential building?there is still a need to encourage  
            building owners to make the decision to actually install fully  
            functioning EV charging facilities."  This bill would  
            "encourage such installations by the business community in the  
            same way such incentives have proven so successful in  
            encouraging the installation of rooftop solar and energy  
            efficiency measures."


           3)Arguments in Opposition  :  Opponents of this bill state that  
            "[t]here is a robust discussion occurring within the state  
            about electric charging infrastructure, which might be  
            financed by utility ratepayers or other sources of financing"  
            but "should the state determine that a tax exemption is an  
            effective means of finance for some purchases (certainly not  
            utility purchases), then the general fund should be reimbursed  
            by the cap-and-trade fund for those losses."  










                                                                    AB 2675


                                                                    Page  7





           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, United  
               States 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 of them (in the form of forgone  
               revenues).  This bill would enact a new tax expenditure  
               program in the form of a partial SUT exclusion and new PIT  
               and CT credit for EV infrastructure.


              b)   Tax Expenditure vs. 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.  This can offer  
               taxpayers greater certainty, but it can also result in tax  
               expenditures remaining part of the tax code without  
               demonstrating any public benefit.  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.  With regard to EV infrastructure,  
               growing acceptance of ZEVs in the marketplace and  
               technological efficiencies may naturally stimulate  
               installation without need for a long-term tax incentive.   
               This bill includes a three-year sunset date for the SUT  
               exclusion and the PIT Law and CT Law credit. 


              c)   SUT Exclusion  :  









                                                                    AB 2675


                                                                    Page  8






                 i)             Overview of the SUT Law  :  California's SUT  
                 Law imposes a sales tax on retailers for the privilege of  
                 selling TPP, absent a specific exclusion or 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, which is imposed on the purchaser.  


                 The current statewide SUT rate is 7.5% with 3.9375%  
                 reserved for the GF, 0.25% reserved for the State's  
                 Education Protection Account established by Proposition  
                 30 (2010), 2.0625% shifted to other local revenue funds,  
                 and 1.25% imposed specifically for county operations and  
                 transportation pursuant to the Bradley-Burns Uniform  
                 Local SUT.  The TUT Law authorizes local jurisdictions to  
                 impose additional taxes up to 2% within the county above  
                 the 7.5% statewide rate.  Since Proposition 30's SUT  
                 provisions are scheduled to expire at the end of this  
                 year, the state portion of the SUT for implementation of  
                 this bill would be 6%.


                 The SUT represents the state's second largest source of  
                 GF revenues.  Nevertheless, California's economy has seen  
                 dramatic growth in the service and information sectors,  
                 resulting in a significant erosion of the SUT base and a  
                 corresponding increase in California's reliance on PIT  
                 revenues.  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.  Furthermore, 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. 









                                                                    AB 2675


                                                                    Page  9






                 It could be argued that, while well-intentioned,  
                 additional SUT exclusions and 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.


                 ii)            A Complicated Calculation  :  This bill  
                 excludes 10% of the price of EV infrastructure from the  
                 SUT, up to the first $400,000 and except for the portion  
                 collected pursuant to Bradley-Burns or the TUT Law. For  
                 example, if a taxpayer purchased $500,000 in EV  
                 infrastructure, the 10% exclusion ($40,000) would result  
                 in only $460,000 of TPP being subject to the SUT in the  
                 state's jurisdiction (6%).  However, Bradley-Burns  
                 (1.25%) and any relevant local TUT would still be  
                 collected on the full $500,000.  Assuming no local TUT,  
                 the taxpayer in this example would owe $27,600 in state  
                 SUT and $6,250 in Bradley-Burns, compared to $36,250  
                 without the exclusion, resulting in savings of $2,400.   
                 According to the BOE, partial exemptions complicate tax  
                 administration for both the BOE and retailers collecting  
                 and remitting SUT.  Return preparation and processing is  
                 more complicated and errors are more likely to occur,  
                 resulting in either increased claims for refund paid by  
                 the state or penalties and interest imposed on retailers.  
                  It is also unclear how the exclusion would be explained  
                 and marketed to taxpayers this bill seeks to incentivize,  
                 even creating the potential for retailers to slightly  
                 increase prices in light of the forthcoming discount.   
                 The Committee may wish to consider potential unintended  
                 consequences of implementing a partial SUT exclusion on  
                 the EV infrastructure market.








                                                                    AB 2675


                                                                    Page  10







              d)   PIT and CT Credit  :


                 i)       What Do You Mean  ?  In addition to the SUT  
                 exclusion, this bill allows taxpayers purchasing EV  
                 infrastructure to also benefit from a PIT or CT credit  
                 equal to 10% of the amount paid during the taxable year  
                 not to exceed $2,500.  Although there is an existing  
                 federal tax credit for EV charging stations, the proposed  
                 state credit does not conform to the federal credit in  
                 scope or value.  As such, the FTB's analysis of this bill  
                 highlights the following implementation questions:


                  A)        This bill states that the credit would be  
                    calculated as a percentage of the amount paid or  
                    incurred by the taxpayer for EV infrastructure, but  
                    does not specify whether the infrastructure must be  
                    used at a qualified dwelling in California, how long  
                    the infrastructure must be placed in service to  
                    qualify for the credit, and whether it must be  
                    purchased or could also be leased.  This bill also  
                    does not specify whether the taxpayer qualifying for  
                    the credit must be the owner of the property or could  
                    be any other individual or business entity, including  
                    entities in the EV infrastructure business, paying or  
                    incurring costs to provide a property with  
                    infrastructure.  Further defining the terms "battery  
                    exchange stations" and other "structures" or  
                    "equipment" necessary to support an EV may also help  
                    resolve any ambiguity.


                  B)        The FTB believes it lacks the expertise to  
                    determine what constitutes EV infrastructure.  Credits  
                    involving areas for which the FTB lacks expertise are  
                    generally certified by another state agency that  








                                                                    AB 2675


                                                                    Page  11





                    possesses the relevant expertise.  The Committee may  
                    wish to consider tasking the CEC or another agency to  
                    work with the FTB in implementing the proposed tax  
                    credit.


                 i)             R&TC Section 41  : SB 1335 (Leno), Chapter  
                 845, Statutes of 2014 added R&TC Section 41, which  
                 recognized that the Legislature should apply the same  
                 level of review used for government spending programs to  
                 tax preference programs, including tax credits.  Thus,  
                 Section 41 requires any bill that is introduced on or  
                 after January 1, 2015 and allows a new PIT or CT credit  
                 to contain specific goals, purposes, and objectives that  
                 the tax credit will achieve.  In addition, Section 41  
                 requires detailed performance indicators for the  
                 Legislature to use when measuring whether the tax credit  
                 meets the goals, purposes, and objectives so-identified.   
                 This bill provides that R&TC Section 41 does not apply to  
                 the proposed tax credit.  The Committee may wish to  
                 consider the appropriateness of this exemption.
                  
              a)   Range Anxiety  :  The author's office states that the  
               CEC's 2016-2017 Investment Plan Update for the ARFVTP  
               indicated that a convenient, reliable network of public EV  
               charging stations is critical to support expansion of EV  
               ownership and that EV chargers for multi-unit dwellings  
               still face ongoing market barriers.  According to the CEC,  
               ARFVTP invests up to $100 million in public funds each year  
               to promote the development of a clean and secure  
               transportation future, and has awarded over $38.7 million  
               for the installation of more than 7,600 commercial,  
               workplace, residential (single-family and multi-unit  
               dwellings), and corridor EV charging stations since 2009.   
               Additionally, California's three investor-owned utilities  
               have recently proposed EV infrastructure programs to  
               encourage greater EV adoption in their territories,  
               totaling $1.1 billion and up to 62,000 charging stations  
               including installations at multiunit dwellings.  Given the  








                                                                    AB 2675


                                                                    Page  12





               implementation considerations highlighted by both the BOE  
               and FTB, the Committee may wish to consider whether  
               improving the flow of funds through ARFVTP or enabling new  
               market competition may be a more efficient way to further  
               incentivize installation of EV infrastructure.  


          1)Technical Amendment  :  Committee staff suggests adoption of  
            technical amendments recasting the allowable PT Law and CT Law  
            credit to be calculated as the lesser of the following:  


              a)   10% of the amount paid or incurred by the taxpayer; or,  


              b)   Two thousand five hundred dollars ($2,500).  


          2)Related Legislation  :  AB 2673 (Harper) creates a SUT exemption  
            and PIT Law and CT Law credit for hydrogen station refueling  
            equipment.  AB 2673 is scheduled to be heard by this Committee  
            today.  


             SB 578 (Block) would have allowed a PIT Law and CT Law credit  
            for electric vehicle charging stations.  SB 578 was held on  
            the Senate Committee on Appropriations' Suspense File.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          ChargePoint









                                                                    AB 2675


                                                                    Page  13






          Climate Resolve


          Electric Vehicle Charging Association




          Opposition


          California Tax Reform Association





          Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098