BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 480 |Hearing |4/22/15 |
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|Author: |Pan |Tax Levy: |No |
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|Version: |2/26/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Taxation: qualified heavy equipment
Enacts a new tax on rentals of qualified heavy equipment in-lieu
of the personal property tax; shifts property tax to compensate
local agencies.
Background and Existing Law
I. Personal Property Taxes. Section 1 of Article XIII of the
California Constitution provides that all property is taxable
unless explicitly exempted by the Constitution or federal law.
While the Constitution limits the maximum amount of any ad
valorem tax on real property at 1% of full cash value, and
precludes reassessment unless the property is newly constructed
or changes ownership, assessors value personal property each
year. The Constitution specifically allows the Legislature to
exempt or change the differential taxation of personal property
by 2/3 vote. The Legislature has previously enacted exemptions
from the personal property tax for particular things, such as
fruit trees, grapevines, and personal property used exclusively
at a zoo, as well as categories, such as pets, personal effects,
and household furnishings. In 1980, the Legislature exempted
all business inventories from the property tax, defined as items
generally held for sale or lease in the ordinary course of
business. Last year, the Legislature exempted property used in
space flight from the personal property tax (AB 777,
Muratsuchi). Additionally, the Legislature has enacted taxes
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in-lieu of the personal property tax, such as the Vehicle
License Fee for vehicles, and the Private Railroad Car Tax. The
Legislature did so due to the difficulties of locally assessing
certain kinds of property.
II. Property tax allocation. California school districts
receive general purpose funds known as a "revenue limit,"
through a mix of local property taxes and state aid. A popular
analogy for school district financing in California is a bucket:
local property taxes fill the bucket first, and then the state
General Fund fills up the remainder. For most districts, every
dollar they receive is one less than the State has to spend.
However, some districts, known as "basic aid" or "excess tax"
districts, fund their revenue limit entirely through property
taxes, and receive no general purpose state aid. Basic aid
districts also retain any excess property taxes within their
district. Property taxes fill these "buckets" entirely, so
another dollar in additional property tax revenue doesn't
fiscally benefit the State.
Proposition 13 (1978) reduced local property tax revenues by 57%
by imposing a statewide property tax rate cap of one per cent,
plus any rates necessary to repay previously approved bonded
indebtedness, and limiting reassessment only to new construction
and changes in ownership. While the prior system allowed each
local jurisdiction to impose its own property tax rate that
applied to each parcel within its taxing jurisdictions, the
initiative forced the Legislature to restructure property tax
allocation in a one per cent world. The Legislature
restructured the allocation of property taxes, basically
freezing each agency's share of countywide taxes as of 1975-76
(AB 8, L. Greene, 1979). Over the years, the Legislature has
shifted local property taxes from other local agencies to
schools to relieve pressure on the General Fund. In 1992-93,
and again in 1993-94, the Legislature permanently shifted
property tax revenues from local governments to each county's
Educational Revenue Augmentation Fund (ERAF) to fund schools,
saving the General Fund billions. The Legislature again made
ERAF shifts in 2004-05. The Legislature also enacted two more
complex fiscal arrangements - the "VLF-property tax swap" and
the "triple-flip" - which shifted funds from ERAF to non-school
local agencies to compensate for other state funding reductions.
In 2004, voters approved Proposition 1A, which limited the
Legislature's authority to affect local finances, including a
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prohibition on shifting property taxes from local agencies to
schools; however, the Legislature can shift property taxes
between non-school local agencies by 2/3 vote.
III. Heavy Equipment Rental Industry. The heavy equipment
rental industry generally makes short-term leases of equipment
to contractors for use in construction. The Legislative
Analyst's Office (LAO), in its March 20, 2013 letter to Asm. Das
Williams regarding tax issues for this industry, states:
The equipment market is highly competitive; numerous
nationwide firms compete in regional markets with smaller,
independent rental companies, and no single company
controlling a substantial market share.
Equipment includes bulldozers, trucks, cranes, and
earthmoving equipment, as well as excavators, asphalt
rollers, tunneling and drilling equipment, heating,
ventilation, air conditioning, power generation, safety,
and lighter equipment.
Most equipment is rented to construction contractors for
use in complex construction projects, generally for short
periods of time, and contactors often use rental equipment
to augment equipment they already own.
Most contracts allow the contractor to determine the end
of the rental period by simply returning the equipment to
the renter, instead of rental agreements of fixed periods.
As personal property, the assessor must value a rental company's
equipment each year at fair market value, generally based on its
adjusted cost as reported by the taxpayer on its business
personal property statement. However, whether rental equipment
is considered taxable property or exempt inventory depends
entirely on its physical location on January 1st of each year:
if the taxpayer hasn't rented the equipment as of the lien date
of January 1st, the equipment is considered exempt inventory,
and isn't taxed for the next year. However, if the property's
rented, it is taxable for the next year, which comprises 60-75%
of all equipment according to LAO. One exception to the above
rule is that under a long-term lease of six months or more, the
equipment becomes assessable to the renter. Another county
assessor may need to then value the equipment if the renter uses
the equipment in a different county.
Heavy equipment rental companies want to instead pay an annual
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tax to the Board of Equalization of 0.75% of the rental price of
its equipment instead of the personal property tax, and
compensate local agencies that would lose revenue from the
exemption by shifting to them from schools an amount equal to
current property tax revenues received from rental equipment.
Proposed Law
Senate Bill 480 contains three changes:
Enacts a new gross receipts tax on qualified renters for
the privilege of renting qualified heavy equipment equal to
.75% of the rental price of the equipment,
Provides that the new tax on equipment rentals is in
lieu of any property tax, and
Shifts local property taxes from schools to other local
agencies to compensate for the exemption, according to
amounts local agencies previously received from heavy
equipment rentals.
I. Gross Receipts Tax. Beginning on January 1, 2016, SB 480
imposes a tax on a qualified heavy equipment renter equal to
.75% of the rental price, as defined, payable each quarter to
the Board of Equalization (BOE). Renters must register with
BOE, and supply specified information. Renters must remit
amounts collected by the last day of the month following the
close of the calendar quarter, and must file electronically.
Qualified renters' principal business must be the rental of
qualified equipment (meaning 50% or more of gross receipts
derive from these rentals), and engaged in a line of business
described in North American Industrial Classification System
Code 532412. The tax only applies to leases of unspecified
terms, or specified terms less than 365 days per year.
BOE administers the tax according to the Fee Collections
Procedures Law, and can issue regulations to implement the tax.
The bill directs BOE to deposit tax revenues in the General
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Fund.
II. Personal Property Tax. SB 480 provides that its tax shall
be in lieu of the personal property tax, commencing in the
2016-17 year. However, the owner of the rental equipment will
continue to pay real property tax as well as property taxes on
all its personal property that isn't qualified heavy equipment.
III. Property Tax Shift. Beginning in 2016-17, each county
auditor must compute a "qualified heavy equipment reimbursement
amount," equal to the total amount of local property taxes
received in the 2014-15 year by all non-school local agencies
from renters of heavy equipment. The auditor then shifts an
amount equal to the reimbursement amount from ERAF to non-school
local agencies, allocated in proportion to each agency's
traditional share. If the county doesn't have sufficient ERAF
balances to shift the full reimbursement amount, the auditor
must reduce property tax revenues to any K-12 basic aid school
districts in the county, again according to each's traditional
share. The auditor then shifts property taxes from non-basic
aid districts until the entire reimbursement amount has been
completely shifted if the first two steps didn't result in fully
reallocating the entire reimbursement amount, again according to
each's traditional share.
State Revenue Impact
According to BOE, SB 480's tax would result in increases to
state revenues commencing in the 2016-17 fiscal year of
approximately $22.8 million.
Comments
1. Purpose of the bill . According to the author, "Currently
the personal property tax owed each year is figured on a tax
rate of 1.25%. The tax is based on each piece of rented
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equipment's valuation on January 1 of each year. AB 2114 would
change this method and instead impose a rate of [0.75%] of the
rental receipts from the short-term leases or rental receipts of
a person whose principal business is derived from the short-term
rental of heavy equipment property. This fee is in lieu of the
personal property tax currently imposed on heavy equipment
rental property and will be collected from rental customers on
each rental invoice. The tax will be administered and collected
by the Board of Equalization. Counties will receive a greater
share of the real property tax to backfill the loss of personal
property tax. This bill will alleviate concerns and provide a
more level playing field for companies that rent out heavy
equipment by imposing a fee at a rate of .75% of the rental
receipts from the short rental receipts of a person whose
principal business is derived from the short-term rental of
heavy equipment property. This bill will allow businesses that
rent or lease heavy equipment to spread out their tax payments
by collecting the property tax from rental customers on each
rental invoice.
2. Precedent . California's personal property tax is often
characterized as its worst when comparing its compliance burden
with the revenue it generates. Firms must complete statements
listing and providing cost information for any item of a value
of more than $100,000, and assessors must in turn fulfil their
Constitutional charge to properly value each item. Real
property can be hard to value, but personal property more so,
which leads to disputes, appeals, and litigation, which seems
excessive when the tax only generates $2 billion annually, and
constitutes less than 4% of total statewide taxable value.
While SB 480 removes this burden by exempting heavy rental
equipment, it does so by directing BOE to enact a new tax
infrastructure, and asking auditors to shift property taxes to
hopefully compensate for the exemption. As such, the measure
removes the current compliance burden from one set of taxpayers,
but places a new one onto BOE and county auditors, who have to
implement the bill. Personal property taxes may be a pain to
comply with, especially with the oddities that apply to heavy
rental equipment, but should the state act to assume new
responsibilities to replace the duties current law places on
taxpayers, especially for one particular industry? The
Committee may wish to consider how acute a taxpayer burden must
be to give rise to the new tax infrastructure necessary to
relieve it.
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3. Certainty . SB 480 proposes a delicate balancing act. A new
substitute tax for the property tax on equipment rentals creates
an initial revenue loss for local agencies receiving current
property taxes from heavy equipment renters. While no official
estimate yet exists, LAO estimates the current personal property
tax on equipment rentals generates between $20 and $25 million
in total annual property tax revenues from heavy equipment
renters' land, buildings, improvements, and other personal
property isn't known. The bill directs county auditors to shift
property tax revenues to local agencies to compensate for the
losses, first from ERAF, then from basic aid school districts,
and ultimately from non-basic aid school districts. Lastly, BOE
estimates that the new heavy equipment tax will result in $22.8
million annually, which is enough to compensate for LAO's
estimate of the non-school district losses only from the
equipment, but not the overall tax revenues that determine the
shift amount. New tax revenues are intended to compensate for
school district revenue losses resulting from the shift, as the
new tax flows to the General Fund, which must backfill schools.
However, SB 480 carries some risk that the balance won't be
maintained, as neither the current amount of property tax
revenue received from rental companies, nor the revenue from the
new tax, is known with certainty. The bill also doesn't account
for any future changes in the value of the equipment, instead
fixing the property tax shift permanently as of the auditor's
calculation as of the amount of revenue received in 2014-15.
Additionally, the revenue from the new tax may be volatile
because it depends largely on the pace of future construction
activity. While the General Fund could benefit if the new tax
revenue exceeds the shifted reimbursement amount, the state
could lose if the opposite occurs, especially because the shift
is calculated by measuring the total amount of property tax from
rental companies, not just the equipment. If the Committee
wants to ensure the balance is maintained, it could pursue a
different course: first, direct assessors and auditors in each
county to first compute the current amount of revenue from
personal property taxes imposed on heavy equipment for the past
five years. Second, require auditors to calculate the revenue
effect of not taxing the equipment for each agency in the
county. Third, ask equipment renters to calculate annual gross
receipts from equipment rentals for same period by requiring
informational returns. Upon having the above information, a
bill could set an annual revenue target of a fixed amount equal
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to the current taxes received from equipment, direct BOE to bill
the industry proportionally according to each's annual gross
receipts, and devise a means of compensating each local agency
according to the specific amount it would lose.
4. Follow the bouncing ball . As discussed above, there's some
risk that SB 480's total revenue balance won't be maintained,
but it's far more complicated to determine its effect on each
effected local agency. A local agency's base property tax
revenue from the personal property tax on heavy equipment
rentals will be based on (1) the value of the equipment in the
county, (2) the level of construction activity in that county on
January 1st each year (the more activity, the less likely the
equipment is with the renter, and therefore exempt inventory),
and (3) its AB 8 share of the property tax. Assuming that the
auditor calculates the shift accurately, non-school local
agencies' losses from the exemption will be compensated by the
shift. For schools, it's even more complicated each will lose
property tax revenues according to its current AB 8 share of the
reimbursement amount, but will be compensated out of new
revenues that flow from amounts the new tax generates for the
General Fund, which must bring individual school districts up to
its revenue limit. Basic aid school districts may lose current
revenue if there aren't sufficient funds in its county's ERAF to
compensate for non-school district local agency revenue losses.
The General Fund benefits from any revenue the new tax generates
not used to backfill school districts.
5. Easier Way ? State law requires assessors to conduct
mandatory audits of certain taxpayers, including its largest
taxpayers, every four years. The rental equipment industry is
often subject to these audits, and argues that they're
burdensome, especially for larger firms with locations in more
than one county, where assessor may apply different audit
techniques and information requirements. Additionally, a rental
equipment firm can move equipment from county to county to meet
demand, adding another layer of complication. However, instead
of changing the way rental equipment is taxed, the Legislature
could instead end mandatory audit requirements, enacted in
response to the assessor scandals of the late 1950s and 1960s,
where assessors were convicted of reducing assessments in
exchange for bribes (AB 180, Petris and Knox, 1966). Today,
county boards of supervisors and the BOE more effectively
monitor assessors that during the time of the scandals. Voters
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also elect assessors, who are in the best position to know which
taxpayers may not be adequately reporting personal property and
business fixtures, and whether an audit may uncover a taxpayer's
lack of compliance. Mandatory audits substitute the
Legislature's judgment of whom an assessor should audit, instead
of the locally-elected property tax expert who can best deploy
audit resources. Additionally, state law no longer specifies
which taxpayers FTB should audit, having removed such direction
for water's edge taxpayers (SB 788, Cogdill, 2007).
6. Incidence . The incidence of a tax is who pays it, and SB
480's swapping of property taxes for a new tax based on rental
price could have a slight incidence effect. Currently, heavy
equipment renters pay property taxes according to the
equipment's value, and whether it's leased or not on January
1st. Renters try to pass through the tax to contractors, either
as a separate item or as part of the total price, and can do so
when demand is high. SB 480's tax is imposed on the renter, who
must register with BOE, file returns, and is liable for
nonpayment; however, because the measure's tax is measured based
on the rental price of the equipment, it will presumably be
explicitly passed through to customers as an item on the bill
7. Shiftiness . Proposition 13 redefined the relationship
between the state and local agencies by directing the state to
allocate local property tax revenue. During times of fiscal
stress, the state shifted property tax revenues away from local
agencies to ERAF, thereby lowering state aid for public
education, but diverting base revenue away from other agencies
with service responsibilities. In 2004, the state and local
agencies negotiated a compromise, which voters approved as
Proposition 1A. The initiative prohibited the state from
shifting to schools or community colleges any share of property
tax revenues allocated to local governments for any fiscal year
under the laws in effect as of November 3, 2004. The measure
also specifies that any change in the way property tax revenues
are allocated between local governments within a county must be
approved by two-thirds of both houses of the Legislature
(instead of by majority votes). Because it shifts revenues from
schools to local agencies, Proposition 1A doesn't bar a measure
like SB 480, but does require the Legislature to enact it by 2/3
vote.
8. BOE administration . In recent years, the Legislature has
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directed BOE to collect more and more fees that apply to
distinct sets of fee payers to pay for specified services. BOE
now administers more than 30 fee programs, with the Legislature
having added the California Tire Fee, the State Responsibility
Area Fire Fee, Electronic Waste Recycling Fee, and the Lumber
Products Assessment in the last ten years, and the Mobile
Telephony Surcharge (MTS) just last year (AB 1717, Perea). SB
480 directs BOE to add yet another tax onto that list before
it's implemented the MTS, and BOE identifies significant costs
to implement the bill. The Committee may wish to consider BOE's
capacity to implement another new program, especially one that
takes effect January 1, 2016, as well as the costs necessary to
do so.
9. Hat trick . As discussed above, Legislative Counsel keyed SB
480 a 2/3 vote because it shifts property taxes between local
agencies. However, SB 480 is also keyed a 2/3 vote for two
other reasons: first, by enacting a new tax, the measure
increases a tax on any taxpayer under Section III of Article
XIIIA of the California Constitution. Additionally, the measure
changes the taxation of personal property from the property tax,
which also requires a 2/3 vote under Article XIII.
10. Sunset . One way to compel an assessment in the future of
SB 480's effects is to insert a sunset provision, which repeals
the law at a specified future date. Those seeking to extend the
law will have to convince a future Legislature to extend the
provision using information gathered during the bill's effective
period. The Committee may wish to consider inserting a sunset
provision into SB 480.
11. Technicals . Committee staff recommends the following
technical amendments:
Allow qualified renters to discharge liabilities when an
account is found worthless and charged-off for income tax
purposes.
Support and
Opposition (4/17/15)
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Support : American Rental Association; BOE member, Diane Harkey;
BOE member, George Runner; California Board of Equalization;
United Rentals (48 individuals); CalTax.
Opposition : California Assessors' Association; California
Special Districts Association; State Association of County
Auditors.
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