BILL ANALYSIS Ó
AB 2749
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Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2749
(Brough) - As Amended March 28, 2016
Majority vote. Fiscal committee.
SUBJECT: Heavy equipment rentals: rental agreements
SUMMARY: Establishes a rebuttable presumption that the parties
agreed to the addition of estimated personal property tax
reimbursement to the "rental price" of "heavy equipment
property" to a lessee if specified conditions occur.
Specifically, this bill:
1)Provides that the question of whether a "qualified heavy
equipment renter" may add estimated personal property tax
reimbursement to the "rental price" of "heavy equipment
property" to a lessee depends solely upon the terms of the
rental agreement.
2)Establishes a presumption that the parties agreed to the
addition of estimated personal property tax reimbursement to
the "rental price" of "heavy equipment property" to a lessee
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if all of the following conditions occur:
a) The rental agreement expressly provides for the addition
of estimated personal property tax reimbursement;
b) Estimated personal property tax reimbursement is
separately stated and charged on the rental agreement;
c) The rental agreement states that the estimated personal
property tax reimbursement amount charged is the amount
estimated by the "qualified heavy equipment renter" owed
for personal property tax on that "heavy equipment
property" for a specified lien date, and that any amounts
exceeding the actual amount of personal property taxes owed
on the "heavy equipment property" will be remitted to the
State Board of Equalization (BOE) for deposit in the state
General Fund; and,
d) The estimated personal property tax reimbursement amount
shall not exceed 0.75% of the "rental price" of the "heavy
equipment property".
3)Provides that the presumptions established by this bill are
rebuttable presumptions.
4)Requires, on or before October 1, 2017, and on or before every
October 1 each year thereafter, a "qualified heavy equipment
renter" to file a return with the BOE, in the form and manner
prescribed by the BOE, if the "qualified heavy equipment
renter" has collected estimated personal property tax
reimbursement amounts exceeding the actual amount of personal
property tax owed on the "heavy equipment property" for the
previous fiscal year lien date.
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5)Requires the "qualified heavy equipment renter" to remit that
excess estimated personal property tax reimbursement amount
with the return and the BOE to deposit those amounts in the
General Fund.
6)Defines "rental price" as the total amount of the charge for
renting the "heavy equipment property", excluding any
separately stated charges that are not rental charges,
including, but not limited to, separately stated charges for
delivery and pickup fees, damage waivers, environmental
mitigation fees, sales tax reimbursement, or use taxes.
7)Defines "heavy equipment property" as rental property of a
"qualified heavy equipment renter".
8)Defines a "qualified heavy equipment renter" as a renter that
satisfies both of the following:
a) The principal business of the renter is the rental of
qualified heavy equipment; and,
b) The renter is engaged in a line of business described in
Code 532412 or 532310 of the North American Industry
Classification System published by the United States Office
of Management and Budget, 2012 edition.
EXISTING LAW:
1)Prescribes the manner in which contracts or agreements may be
created.
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2)Provides that all property is taxable absent a specific
constitutional or statutory exemption. The county assessor
determines taxability each year, generally on the January 1
lien date.
FISCAL EFFECT: The BOE states that the revenue impact is
indeterminable, but that there is a potential for state General
Fund revenue gains.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
Renters of Heavy Equipment must pay local personal property
taxes on the value of the heavy equipment they rent. The
tax is applied only if the equipment is out on rent January
1. Local assessors are responsible for the assessment and
determination of value of the equipment. Rental companies
have many disputes over the value of the equipment.
Valuation, payment, audits and appeals of the personal
property tax are expensive and time consuming for renters.
This bill authorizes renters of heavy equipment to include
a line item on a rental contract for the costs of personal
property tax payment. The Legislative Analyst Office in a
report has commented the personal property tax is a
challenge for taxpayers to administer.
The language is only authorization for the charge, it does
not require the rental company to collect the charge. It
does not cost state or local governments any property tax
revenue. The personal property tax collects an estimated
$21 million in revenue. That amount would still be
collected in full and paid to the counties. Customers
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retain choice of whether to pay the charge or use different
equipment, or a separate Rental Company. The authorization
protects equipment companies from future legal challenges
over the charge. Heavy equipment rentals are an important
component of the heavy construction industry including road
and infrastructure construction.
2)The BOE notes the following in its staff analysis of this
bill:
a) Nothing prevents these rental companies from seeking
reimbursement currently : "The law does not prohibit rental
companies from separately stating a charge for
reimbursement currently."
b) Bill only requires returns when excess tax reimbursement
occurs : "This could be problematic, since the BOE will
have no knowledge of whether a qualified renter collected
excess tax reimbursement and simply failed to file a
return."
c) Bill has no administrative provisions : "The bill
contains no provisions for the administration and
collection of the excess tax reimbursement, such as return
and remittance due dates, applicable penalty and interest
for late payments, appeals rights for any disputed amounts,
etc. Staff will work with the author's office to address
this concern as the bill progresses."
d) Use tax will apply to the proposed property tax
reimbursement amount : "Under the Sales and Use Tax Law,
any lease or rental of tangible personal property for a
consideration is a 'sale' and a 'purchase' (except for
certain items not relevant here). Generally, a lease of
tangible personal property is regarded as a continuing
'sale' and a continuing 'purchase,' and the use tax applies
to the rental amount, including any payments required by
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the lease, such as amounts paid for personal property taxes
on the leased property. The lessor is required to collect
the use tax from the lessee at the time the rentals are
paid by the lessee. Accordingly, any separately stated
property tax reimbursement collected by a renter under this
bill will be subject to the use tax."
3)Committee Staff Comments:
a) California's property tax : Personal property used in a
trade or business is generally taxable, and is valued each
lien date (i.e., January 1) at its current fair market
value, taking into account the property's age and
condition. The tax rate applied to personal property is
the same as that applied to real property<1> - 1% plus
voter-approved debt rates used to finance local
infrastructure projects.<2>
Historically, all business property was subject to
taxation. In 1979, however, the Legislature established a
"business inventory exemption" to remove any incentives
companies had to locate their product inventories in other
states. Thus, rental equipment that is not being leased or
rented on the January 1 lien date
qualifies as business inventory and is exempt from
taxation. As a result, the Legislative Analyst's Office
(LAO) notes that rental companies only pay annual property
taxes on the portion of their equipment - typically 60 to
75% - that is rented on the lien date.
-------------------------
<1> Real property includes land, buildings, and other permanent
structures, whereas personal property primarily consists of
business property, such as manufacturing equipment, computer
systems, and rental equipment. The LAO notes that, in FY
2010-11, personal property accounted for roughly 4% of the total
taxable value of all property in California and generated about
$2 billion in property taxes.
<2> The LAO notes that, in 2013, the statewide average rate,
inclusive of voter-approved debt rates, was 1.19% of assessed
value.
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b) The distribution of property tax revenues : Generally,
personal property tax revenues are allocated according to
the property's "situs" (i.e., location) and accrue only to
those taxing jurisdictions in the tax rate area where the
property is located. Pursuant to Property Tax Rule 204,
property rented on a daily, weekly, or other short-term
basis of six months or less, has situs at the place where
the owner normally keeps the property. The BOE notes that,
"[f]or property rented for an extended, but unspecified,
period or more than a 6-month term" the assessor determines
situs based on the rentee's use.
c) What would this bill do ? This bill establishes a
rebuttable presumption that in a heavy equipment rental
agreement the parties agreed to the addition of estimated
personal property tax reimbursement to the heavy equipment
rental price under specified conditions.
d) What is the problem ? The author's office notes that
California's system of assessing and taxing personal
property, particularly heavy equipment rentals, is very
complicated. Record-keeping is often a challenge. In
addition, heavy equipment rental companies with multiple
locations in the state are often subjected to numerous
audits each year in different jurisdictions. The author
notes that, "AB 2749 would provide express authority to the
renter to charge a fee to the rentee to cover the costs of
administering the collection of the property tax on heavy
equipment." The author's office further notes that current
law is silent regarding a rental company's authority to
charge for property tax reimbursement. The BOE, however,
notes that there is nothing in current law that would
prohibit rental companies from adding a surcharge for
personal property tax reimbursement. Moreover, it is not
clear to Committee staff why a line item in a rental
agreement would be subject to legal challenge. Rental
companies are ostensibly already charging their customers
for the economic burden of the personal property tax. A
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separate line item would just make the cost more
transparent. Moreover, while this bill would authorize
heavy equipment renters to add a separate line item to
their rental contracts, it would do nothing to take rental
equipment out of the local tax base. Rental companies
would continue to have to pay personal property taxes on
this equipment at the local level, with all the attendant
administrative complexities involved. Indeed, it could be
argued that this bill would add another administrative
complication by requiring renters to track reimbursement
payments, compare the total to actual taxes owed, and remit
the difference to the state.
e) A precedent for ad hoc treatment ? The current system of
personal property taxation poses certain administrative
difficulties for heavy equipment rental companies. The LAO
notes that large rental companies have as many as 500
rental pieces at each branch and that their rental fleets
move regularly between branches based on project demand.
That said, this is by no means the only industry that faces
challenges resulting from operating in numerous counties.
Moreover, conflicts concerning the proper valuation of
business property are part and parcel of the current
system. These administrative difficulties have even led
some to question the overall utility of the personal
property tax as a mechanism for efficiently raising
revenues. To this end, the LAO has noted:
Due to its market value assessment, appeals workload,
and audit requirements, the personal property tax is a
relatively costly tax for businesses to comply with
and for county assessors to administer, especially
when compared with the property tax as it applies to
real property.
That said, the Committee may wish to consider the inherent
drawbacks of adopting an ad hoc approach designed to
alleviate the burdens faced by one industry. Such action
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could establish a precedent for other industries seeking
special treatment based on the peculiar nature of their
business model.
f) Definitional clarity : This bill defines a "qualified
heavy equipment renter" as a renter that satisfies both of
the following: (1) the principal business of the renter is
the rental of qualified heavy equipment, and (2) the renter
is engaged in a line of business described in Code 532412
or 532310 of the North American Industry Classification
System. This bill does not, however, appear to define the
term "qualified heavy equipment". This bill does, however,
provide a definition for "heavy equipment property" -
namely, the rental property of a qualified heavy equipment
renter. The Committee may wish to consider adding a
specific definition of qualified heavy equipment in line
with previous bills on this subject.
g) Code placement : This bill currently places the
presumption language in the Civil Code, alongside various
cannons of contractual interpretation from the 19th
century. The author and Committee may wish to consider
whether it would preferable to place this bill's language
in the Revenue and Taxation Code.
h) Related legislation :
i) AB 2114 (Pan), of the 2013-14 Regular Session, would
have imposed an in lieu tax on every qualified renter of
qualified heavy equipment (QHE) at the rate of 0.75% of
the rental price, as specified. AB 2114 was held by the
Assembly Committee on Appropriations.
ii) AB 1055 (Pan), of the 2013-14 Regular Session, would
have imposed an in lieu tax on every qualified rentee of
QHE at an unspecified rate. AB 1055 was never heard by
this Committee and was returned to the Chief Clerk.
iii) AB 1941 (Ma), of the 2011-12 Regular Session, would
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have imposed an in lieu tax on every qualified lessee of
QHE at the rate of 1.25% of the gross receipts from the
lease or rental of QHE. AB 1941 was held in this
Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
United Rentals
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098
AB 2749
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