BILL ANALYSIS
AB 1812
Page A
Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1812 (Silva) - As Introduced: February 11, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: manufacturing
equipment
SUMMARY : Creates a partial sales and use tax (SUT) exemption,
operative January 1, 2011, for specified tangible personal
property (TPP). Specifically, this bill :
1)States that it is the Legislature's intent to enact
competitive tax policy for manufacturers by providing for an
exemption of purchases of manufacturing equipment used in the
manufacturing process from the state SUT.
2)Exempts the following from SUT:
a) TPP purchased by a "qualified person" for use primarily
in the manufacturing, processing, refining, fabricating, or
recycling of property; and,
b) TPP purchased by a contractor for use in the performance
of a construction contract for a "qualified person" who
will use the TPP as an integral part of the manufacturing,
processing, refining, fabricating, or recycling process, or
as a storage facility for use in connection with the
manufacturing process.
3)Defines a "qualified person" to mean either of the following:
a) A person engaged in those lines of business described in
Codes 3111 to 3399, inclusive, or 5112 of the North
American Industry Classification System (NAICS), 2007
edition; or,
a) An affiliate of such a person, provided the affiliate is
a member of the qualified person's unitary group for which
a combined report is required to be filed, as provided.
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4)Provides that TPP includes, but is not limited to, all of the
following:
a) Machinery and equipment, including component parts and
contrivances;
b) Equipment used to operate, control, or maintain the
machinery, including computers, data processing equipment,
and computer software;
c) Property used in pollution control that meets standards
established by the state or any local or regional
governmental agency within California;
d) Special purpose buildings and foundations, as defined;
and,
e) Fuels used or consumed in the manufacturing process.
5)Specifies that TPP does not include:
a) Consumables with a normal useful life of less than one
year, except for fuels used in the manufacturing process;
b) Furniture, inventory, and equipment used in the
extraction process, or equipment used to store finished
products that have completed the manufacturing process;
and,
c) Property used primarily in administration, general
management, or marketing.
6)Defines "fabricating" as making, building, creating,
producing, or assembling components or property to work in a
new or different manner.
7)Defines "manufacturing" as the activity of converting or
conditioning property by changing the form, composition,
quality, or character of the property for ultimate sale at
retail or use in the manufacturing of a product to be
ultimately sold at retail. Manufacturing includes any
improvements to TPP that result in a greater service life or
greater functionality than that of the original property.
8)Defines "process" to mean the period beginning at the point at
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which any raw materials are received by the qualified taxpayer
and introduced into the manufacturing, processing, refining,
fabricating, or recycling activity of the qualified taxpayer,
and ending at the point at which the qualified activity has
altered TPP to its completed form. Raw materials are
considered to have been introduced into the process when the
raw materials are stored on the same premises where the
qualified activity is conducted.
9)Defines "processing" as the physical application of the
materials and labor necessary to modify or change the
characteristics of the property.
10)Defines "refining" as the process of converting a natural
resource to an intermediate or finished product.
11)Provides that no exemption shall be allowed unless the
purchaser provides the retailer with an exemption certificate,
and the retailer then provides the State Board of Equalization
(BOE) with a copy.
12)Provides that the exemption does not apply to any of the
following:
a) Any tax levied by a county, city, or district pursuant
to, or in accordance with, the Bradley-Burns Uniform Local
SUT Law or the Transactions and Use Tax Law;
b) Any tax levied pursuant to Revenue and Taxation Code
(R&TC) Sections 6051.2 or 6201.2 (Local Revenue Fund);
c) Any tax levied pursuant to R&TC Sections 6051.5 or
6201.5 (State Fiscal Recovery Fund);
d) Section 35 of Article XIII of the California
Constitution (Local Public Safety Fund); or,
e) Any sale or use of property which, within one year of
being purchased, is removed from California or converted to
a non-exempt use.
13)Provides that the exemption applies to leases of TPP
classified as "continuing sales" and "continuing purchases"
under existing law.
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14)Takes immediate effect as a tax levy.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling TPP,
absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)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 be remitted to BOE.
PRIOR STATE LAW : Prior to January 1, 2004, California law
contained various tax incentives [collectively referred to as
the Manufacturers' Investment Credit (MIC)] designed to
encourage investment in manufacturing equipment. Specifically,
prior state law:
1)Provided a partial SUT exemption for purchases of specified
manufacturing equipment, or an income tax credit equal to 6%
of the amount paid or incurred for qualified property placed
in service in California. Specifically, the MIC:
a) Defined a "qualified person" as any taxpayer engaged in
the manufacturing activities described in specific Standard
Industrial Classification (SIC) Manual Codes.
b) Limited the availability of the SUT exemption to a
qualified person engaged in a new trade or business.
2)Defined qualified TPP as equipment used primarily for
manufacturing, processing, refining, fabricating, or
recycling; for research and development; for maintenance,
repair, measurement, or testing of qualified property; and for
pollution control meeting state standards. Special purpose
buildings were also included as qualified property.
3)Provided for the MIC's sunset on January 1, 2001, or on
January 1 of the earliest year thereafter, if the total
manufacturing employment in this state, as determined by the
Employment Development Department on the preceding January 1,
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did not exceed by 100,000 jobs the total manufacturing
employment in California on January 1, 1994.
FISCAL EFFECT : BOE estimates that this bill will result in a
revenue loss of $600 million in fiscal year (FY) 2010-11, and
$1.1 billion in FY 2011-12.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
California's business community has lost its prominence
among competing states. This is counterintuitive
considering the state's rich resources, plentiful
workforce, and climate. It appears that these amenities
are eclipsed by the cost of operating in California, where
the cost of conducting business is higher than in any other
state. There is little dispute that this has been causal
in the deterioration of our economy, especially in the
evaporation of thousands of jobs. AB 1812 will help to
lower the cost of business for California's manufacturing
industry . . . . Decreasing manufacturers' costs is the
most effective way to entice them to engage in business in
California; thereby providing increased revenue sources and
jobs.
2)Proponents state:
California is one of only three states (Wyoming and South
Dakota are the other two) in the US that taxes
manufacturing equipment purchases with no credit or
exemption. Most states recognize that taxing the input as
well as the final manufactured product is double taxation
and discourages investment. The current policy has
resulted in less production in California - out-of-state
companies electing to grow elsewhere and in-state companies
continuing to shift workers or facilities to other regions
that do not burden capital investments with excess
taxation. (Emphasis in original.)
3)Committee Staff Comments:
a) Is the Proposed SUT Exemption for Business Purchases
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Good Tax Policy ? Most economists who study government
finance and taxation agree that business inputs (e.g.,
machinery, research equipment, raw materials, etc.) should
be exempt from sales tax because, generally, business
outputs are already subject to sales tax, and taxing both
business inputs and business outputs results in double
taxation. Indeed, this bill should probably not be viewed
as a "tax expenditure" designed to stimulate the economy,
but rather as a proposal for fundamentally reforming the
current tax structure to more closely resemble a Value
Added Tax (VAT). The VAT, used to finance most European
governments, is economically equivalent to a sales tax with
a broad exemption for business inputs. More precisely, it
is a sophisticated sales tax that allows VAT-registered
businesses a credit for taxes paid on purchases against tax
liability on sales. At this Committee's informational
hearing on March 23, 2009, the panelists unanimously agreed
that it would be good tax policy to eliminate the SUT on
business purchases. However, Committee Members were urged
against implementing a VAT in California before the
enactment of a VAT at the federal level.
Before passing a measure like this one, which arguably
represents sound tax policy, the Committee may wish to
consider other reforms to the SUT Law. In fact, Dr.
Charles McLure, in his testimony before this Committee,
emphasized that a reduction in the taxation of business
inputs would reduce sales tax revenues and would require
both a tax base expansion and tax rate increase to
compensate for the revenue loss. (C. McLure, Jr.,
Improving California's Tax System, Testimony before the
California Assembly Revenue and Taxation Committee, March
23, 2009). In most countries that use a VAT system, for
example, the system includes some taxation of services
(although not as inputs to businesses). Therefore, before
California moves in this direction, it may wish to consider
which services - in addition to goods - should be taxed.
b) Notification Requirement . This bill does not require
the manufacturer to notify BOE if property is removed from
California or converted from an exempt use within one year,
and there is currently no means, other than an audit,
through which BOE would learn of the new sales tax
liability.
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c) Sunset Date . Committee staff notes that, unlike the
previous MIC, this bill does not contain a sunset date.
Arguments in favor of not providing a sunset include the
promotion of certainty needed for long-term planning
purposes. Arguments in favor of a sunset include providing
the Legislature the ability to review the exemption's
effectiveness in the future. Committee staff suggests that
this bill be amended to include a sunset date.
d) Definition of a Qualified Person : In defining a
"qualified person," Committee staff suggests amending this
bill to require that the qualifying entity be primarily
engaged in the activities specified in the referenced NAICS
codes. The failure to include such language in the MIC led
to many taxpayer disputes with BOE.
e) Definition of Useful Life : This bill provides that TPP
shall not include consumables with a normal useful life of
less than one year. To reduce potential audit disputes,
this bill should be amended to include some mechanism for
determining useful life.
f) Related Bills in the Current Legislative Session :
i) AB 1719 (Harkey) would create a partial SUT
exemption for specified business equipment. AB 1719 is
scheduled to be heard in this Committee along with this
measure.
ii) AB 2280 (Miller) would create a complete SUT
exemption for equipment a manufacturer purchases for use
in its manufacturing business in this state. AB 2280 is
scheduled to be heard in this Committee along with this
measure.
iii) AB 2525 (Blumenfield) would create a partial SUT
exemption for equipment used primarily in any stage of
the manufacturing, processing, refining, fabricating, or
recycling of property in clean energy technology. AB
2525 is scheduled to be heard in this Committee on May 3,
2010.
iv) AB 2640 (Arambula) would, among other things, create
a partial SUT exemption for specified depreciable
manufacturing equipment. AB 2640 is scheduled to be
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heard in this Committee on May 3, 2010.
REGISTERED SUPPORT / OPPOSITION :
Support
California Aerospace & Technology Association
California Manufacturers & Technology Association
California Taxpayers' Association
TechAmerica
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098