BILL ANALYSIS
AB 1159
Page 1
Date of Hearing: May 11, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1159 (V. Manuel Perez) - As Introduced: February 27, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax credits: sales and use taxes: qualified
property.
SUMMARY : Allows an income tax credit, for taxable years
beginning on or after January 1, 2009, and before January 1,
2016, in an amount equal to the sales and use tax (SUT) paid or
incurred for the purchase of "qualified property."
Specifically, this bill :
1)Contains the following legislative findings and declarations:
a) The enactment of AB 32 (Nunez), Chapter 488, Statutes of
2006, made California a national and global policy leader
in the effort to reduce greenhouse gases that pose serious
threats to the state's natural environment and residents'
health and safety.
b) The prospect of global warming is very real and there is
an urgent need to develop, market, and use products,
equipment, and services that reduce the formation of
greenhouse gases.
c) The level of concern over greenhouse gas emissions has
begun to focus American technological research and
investment on developing products and processes that
produce zero or ultra-low emissions of carbon dioxide, the
primary greenhouse gas.
d) It is in the best interest of this state to foster a
competitive cleantech industry by offering investors
financial incentives to spur cleantech research and
development, production, and utilization of environmentally
clean products.
2)States legislative intent to enact and enhance targeted tax
credits to increase investment in cleantech activities and
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renewable energy, as well as maintain and enhance California's
competitive lead in attracting investment capital, clean
industry, and high-paying, skilled jobs.
3)Allows a credit to a taxpayer, under both the Personal Income
Tax (PIT) Law and the Corporation Tax (CT) Law, for the total
amount of SUT paid or incurred by that taxpayer during the
taxable year for the purchase of "qualified property".
4)Defines "qualified property" as any property used in an
enterprise zone (EZ), targeted tax area (TTA), or a local
military base realignment for the production or generation of
renewable energy.
5)Authorizes a carryover of the unused credit to four succeeding
taxable years, if necessary, until the credit is exhausted.
6)Applies to taxable years beginning on or after January 1,
2009, and before January 1, 2016.
7)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW provides an energy investment tax credit
and a tax credit for businesses for the production of
electricity from certain renewable resources. The energy
investment credit is allowed for the equipment that uses solar
energy to generate electricity or the equipment that produces,
distributes, or uses energy derived from geothermal deposits.
The business credit is allowed for the production of energy from
wind, closed-loop biomass, and poultry waste.
EXISTING STATE LAW :
1)Imposes sales tax on the retail sale of tangible personal
property (TPP) to be used or consumed in California. Use tax
is imposed on the storage, use or other consumption in
California of TPP purchased outside of California.
2)Allows numerous exemptions from the SUT, for example, for
sales and purchases of teleproduction equipment and farm
equipment.
3)Allows a taxpayer to deduct ordinary and necessary expenses
related to a trade or business but requires a taxpayer to
capitalize the costs of acquiring assets used in the
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taxpayer's trade or business that provide economic benefits
for more than one year. Taxpayers recover their investment in
assets through depreciation, which approximates the useful or
economic life of the asset. Oftentimes tax incentives, such
as accelerated depreciation or credits, will be enacted that
operate as an incentive for certain behaviors or to reduce the
costs of acquiring assets.
4)Provides four distinct programs offering tax incentives to
taxpayers that employ qualified individuals within
geographically targeted economic development areas: EZs, Local
Agency Military Base Recovery Areas (LAMBRA), Manufacturing
Enhancement Areas (MEA), and TTAs. EZs are designated for 15
years (except EZs that meet certain criteria may be extended
to 20 years), and 42 EZs have been designated by the
Technology and Trade and Commerce Agency as of May 10, 2007.
Out of eight authorized LAMBRA designations, six areas have
already been designated as LAMBRAs. The TTA was designated
November 1, 1998, and the MEAs were designated October 1,
1998. Both the TTA and MEAs designation are binding for 15
years.
5)Provides special tax incentives for taxpayers conducting
business activities within economic development areas. Among
many other incentives, allows a credit for the sales and use
taxes paid by taxpayers on the purchase of "qualified
property" purchased for exclusive use in an economic
development area (except a MEA).
a) EZ or TTA : "Qualified property" is defined as all of
the following:
i) Machinery and machinery parts used for:
(1) Manufacturing, processing, assembling, or
fabricating;
(2) Producing renewable energy resources; or,
(3) Air or water pollution control mechanisms.
ii) Data processing and communication equipment.
iii) Certain motion picture manufacturing equipment.
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b) LAMBRA : "Qualified property" means high-technology
equipment, aircraft maintenance equipment, aircraft
components, or certain depreciable property.
6)Requires that "qualified property" be purchased and placed in
service before the economic development area designation
expires and limits the maximum value of property that may be
eligible for the EZ, LAMBRA, and TTA SUT credit of $1 million
for individuals and $20 million for corporations.
7)Limits the amount of credit available to businesses operating
inside and outside of an economic development area to the
amount of tax on income attributable to the economic
development area.
8)Allows corporate taxpayers that are members of a combined
reporting group to make a one-time irrevocable assignment of
eligible credits to an eligible assignee, for taxable years
beginning on or after January 1, 2008. The assigned credits
could be used to reduce tax of the assignee in taxable years
beginning on or after January 1, 2010.
9)Limits, for taxable years beginning on or after January 1,
2008, and before January 1, 2010, the amount of total business
credits available to taxpayers to 50%.
PRIOR STATE LAW : Contained tax incentives, prior to January 1,
2004, known as the manufacturing investment credit (MIC), to
encourage investment in manufacturing equipment to be used in
California as follows:
1)Allowed qualified taxpayers an exemption from tax under the
SUT, or a credit against the PIT or CT.
2)Defined a qualified taxpayer as any taxpayer engaged in the
manufacturing activities described in specific SIC Manual
Codes listed; and limited the availability of the SUT
exemption to a qualified taxpayer engaged in a new trade or
business, i.e., one that has been conducted by the taxpayer
for not more than 36 months.
3)Provided for an exemption from the state share of the SUT
(equal to 5%) or a tax credit against the PIT or CT liability
(equal to 6%) of the amount paid or incurred for qualified
property placed in service in California.
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4)Excluded certain types of property from the definition of
qualified property, (e.g., furniture, inventory, and equipment
used in an extraction process).
5)Provided that the MIC sunsets on the later of: January 2001
or the January 1 of the earliest subsequent year if total
manufacturing jobs in California, as determined by the
Employment Development Department on the preceding January 1,
does not exceed the total manufacturing jobs in California on
January 1, 1994 by 100,000 jobs.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in a revenue loss of $2.3 million in
fiscal year (FY) 2009-10, $2.8 million in FY 2010-11, and $3.5
million in FY 2011-12. In calculating these revenue estimates,
FTB staff assumed that purchases of energy-efficient property,
such as products with Energy Star certification, would not
qualify for the credit allowed by this bill. Also, the
estimates did not include any revenue loss from the purchase of
property to build a new renewable-energy-producing facility,
such as a geothermal or solar plant operated by a utility.
COMMENTS :
1)The purpose of this bill . According to the author, AB 1159
establishes the California Cleantech Advantage Act of 2008
that would provide a targeted incentive to strengthen
California's competitive edge in the leading emerging clean
technologies. The author states that this bill would
encourage "the cleantech industry to combine focused
incentives with the state's most comprehensive economic
development infrastructure" and would strengthen California's
position "as a global leader in the coming cleantech business
explosion." The author further states that "[t]he tax
incentive provided by this bill will attract new venture
capital to ?[the] historically underserved areas [in
California], while helping the state meet a variety of
environmental objectives."
2)The opponents question the effectiveness of EZs, TTAs and
other tax incentive zones, in general, citing studies that
have shown the state's EZ program to be both ineffective and
full of waste, fraud, and abuse, and in dire need of reform.
The opponents argue that California should not provide
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additional tax incentives in these zones until the program
itself is reformed and assert that the generation of renewable
energy in an EZ does not warrant special tax treatment.
3)Committee staff notes all of the following:
a) California's Clean Technology Economy . The author
states that Clean Technology economy is a relatively new
and emerging industry encompassing a broad range of
products and services, including alternative energy
generation, wastewater treatment technologies, and
production of environmentally friendly consumer products.
The growth of the cleantech industry is the result of two
disparate factors converging to create a new market:
recent advances in the industry that have lowered the cost
of environmentally sensitive technologies and an increasing
number of consumers and businesses that are looking for
ways to reduce energy costs and meet new environmental
regulations. Cleantech now represents the third largest
investment category in North America, moving ahead of
medical devices and semiconductors, and behind only
biotechnology and software. (Assembly Committee on Jobs,
Economic Development and the Economy, 2007-08 Summary of
Legislation, p. 14). In general, California is
well-positioned to take advantage of the new cleantech
market, because of the thriving technology base, existing
entrepreneurial and management talent, access to a full
range of capital, and proactive environmental policies,
e.g. AB 32 (Nunez), Chapter 488, Statutes of 2006. (Id.,
at p. 15). A March 2008 study by the California Economic
Strategy Panel found that the California cleantech industry
is primarily engaged in energy generation and energy
efficiency with solar comprising 64% of establishments and
53% of employment. The study also found that employment in
the manufacturing industry comprised 41% of employment and
15% of the establishments in California cleantech. (Ibid.).
b) Existing tax incentives for economic development areas,
such as TTAs, EZs, and LAMBRAs . Existing law already
provides a credit for the purchase of recycling equipment
and manufacturing equipment used for the production of
renewable energy sources in EZs or TTAs. Because the
definition of "qualified property" in AB 1159 is very
broad, it appears that the same piece of equipment may,
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potentially, qualify for credits under both existing law
and this bill. However, nothing in AB 1159 prevents a
taxpayer from claiming multiple credits for the same piece
of equipment. Committee staff questions tax policy that
provides taxpayers with multiple tax benefits for the same
expense.
c) Limitations on the utilization of the economic
development area credits . Under existing law, the tax
credits allowed to a taxpayer doing business in economic
development areas can only reduce the tax on income
attributable to activity within the economic development
area. This bill allows the credit to offset tax on income
attributable to activity outside of the specified economic
development areas, which is an unprecedented departure from
the long-standing policy of limiting the utilization of the
economic development area credits.
d) Does the "taxpayer" have to use "qualified property" in
the taxpayer's business ? It appears that individual
taxpayers using property for the production or generation
of renewable energy for their personal consumption would
qualify for the credit under this bill. Presumably, a
taxpayer who installs a solar panel on his/her house would
be eligible to claim a credit under AB 1159, as long as the
house is located within one of the eligible economic
development areas. In other words, AB 1159 does not
require a taxpayer to use "qualified property" in his/her
or its business. If the author intends to allow a credit
for personal consumption, Committee staff suggests that
this bill be amended to include express language
authorizing such a use, in order to avoid any disputes
between taxpayers and the FTB.
e) Former MIC . Under the former MIC program, certain types
of property were excluded from the definition of "qualified
property" because those types of property were not directly
related to the manufacturing process or research and
development. Thus, the term "qualified property" did not
include furniture, inventory, equipment used in an
extraction process, facilities used for warehousing
purposes and equipment used to store finished products
after completion of the manufacturing process, and TPP used
in administration, general management, and marketing.
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f) Problematic definition of "qualified property". Unlike
prior law, AB 1159 contains an all-encompassing definition
of "qualified property" to include any property that is
used in an economic development area to produce or generate
renewable energy. If the intent of AB 1159 is to encourage
development of new renewable technologies, then the author
may wish to limit the definition of "qualified property"
only to those types of property that are directly used in
research, development, or production of renewable energy
and renewal energy products.
Furthermore, it appears AB 1159 places no restrictions on how
long the qualified property must be "used" by the taxpayer
in an economic development area. Presumably, the taxpayer
could use the property in the economic development area
just during the taxable year in which the credit is claimed
and later move that property anywhere else in the state, or
outside of the state, without losing the credit.
Alternatively, the taxpayer could resell that property in
this state to another purchaser. The new purchaser,
arguably, would also be eligible to claim the credit
allowed by AB 1159, because this bill does not prevent
taxpayers from making multiple claims for the same piece of
equipment.
g) Does the SUT include just the state portion of the SUT ?
Currently, most SUT exemptions apply to the total
applicable SUT, but there are a few partial exemptions
where only the state tax portion of the state and SUT rate
is exempted. Committee staff suggests that this bill be
amended to specify the rate of the SUT eligible for the
income tax credit and whether the rate includes the local
portion of the SUT.
4)FTB staff has identified several implementation concerns
including, among others, all of the following:
a) AB 1159 does not provide a definition of the term
"production or generation of renewable energy". The
absence of the definition may lead to disputes between the
FTB and taxpayers and could complicate the administration
of the credit.
b) FTB staff does not have expertise in the production or
generation of renewable energy and, therefore, suggests
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that another agency certify whether the property purchased
by a taxpayer is "qualified property".
c) AB 1159 fails to state whether the zone designation must
be in effect at the time the purchases are made in order to
qualify for the credit and whether the EZ, TTA, or LAMBRA
must be located in California.
d) AB 1159 fails to include a recapture provision, which
would require the taxpayer to use the equipment for a
certain length of time in the designated areas in
California or add all or some portion of the credit amount
back to the tax liability.
5)Related legislation .
AB 829 (Caballero), introduced in the 2009-10 Legislative
Session, would allow a SUT exemption for purchases of
qualified equipment and an income tax credit for SUT paid on
the purchase of TPP by qualified manufacturers. AB 829 is set
to be heard by this committee on May 18, 2009.
AB 1029 (Blumenfield), introduced in the 2009-10 Legislative
Session, would allow a credit for taxable years beginning on
or after January 1, 2009, and before January 1, 2011, in an
amount equal to an unspecified percent of the amount paid or
incurred during the taxable year by a qualified taxpayer in
connection with the manufacture of qualified solar energy
materials. AB 1029 is set to be heard in this Committee on
May 11, 2009.
AB 1527 (Arambula), introduced in the 2007-08 Legislative
Session, would have allowed a credit for research conducted in
California that is dedicated to the development of cleantech
technologies for taxable years beginning on or after January
1, 2009. AB 1527 was held under submission in this committee.
SB 200 (Kelley), Chapter 609, Statutes of 1997, made various
technical changes to the credits allowed under the EZ Act.
AB 2798 (Machado), Chapter 323, Statutes of 1998, clarified the
EZ incentive calculation for apportioning corporations.
SB 2023 (Costa), Chapter 955, Statutes 1996, enacted the EZ Act
that, among other things, allowed a credit for SUT paid by a
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taxpayer for qualified property placed into service in a
California EZ.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098