BILL ANALYSIS
AB 2280
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Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2280 (Miller) - As Introduced: February 18, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: business equipment
SUMMARY : Creates a complete sales and use tax (SUT) exemption
for all manufacturing equipment. Specifically, this bill :
1)Creates a complete SUT exemption for equipment a manufacturer
purchases for use in its manufacturing business in this state.
2)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for SUT revenues lost as a
result of this exemption.
3)Takes immediate effect as a tax levy.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling tangible
personal property (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 the State Board of
Equalization (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:
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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,
did not exceed by 100,000 jobs the total manufacturing
employment in California on January 1, 1994.
FISCAL EFFECT : BOE estimates that this bill would result in
annual General Fund revenue losses of roughly $1.8 billion in
fiscal year (FY) 2010-11 and of $1.7 billion in FY 2011-12. It
should be noted, however, that given this bill's lack of
specificity regarding the proposed exemption's scope, BOE's
estimate necessarily relies on certain assumption spelled out in
BOE's staff analysis of this bill.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Our ability to meet our state's economic needs depends on a
healthy and competitive California economy. A healthy and
stable economy for California is one that relies on
production rather than just services and consumption
occurring in the state. Enacting [a sales] tax exemption
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provides for a new and improved tax treatment for
manufacturing and R&D investments that will send a strong
message that California is able to maintain fair and stable
tax policies and to make the state more business-friendly
even during these difficult economic times.
2)Proponents of this measure 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)BOE's analysis of this bill raises the following issues:
a) The term "manufacturer" should be defined. BOE notes
that manufacturing encompasses many different activities,
ranging from the assembling of component parts to the
manufacturing of canned fruits and vegetables. The state's
former manufacturing exemption provided a detailed
definition for the term "manufacturing," along with
definitions for "fabricating," "refining," and
"processing." In addition, the former exemption defined
qualified manufacturers by reference to specific
manufacturing activities set forth in the SIC Manual Codes,
which have since been replaced by the North American
Industry Classification System codes. Thus, to administer
the proposed exemption effectively, BOE recommends amending
this bill to provide appropriate definitions.
b) It is unclear what uses of "equipment" would qualify for
the proposed exemption. Would qualifying equipment be
limited to equipment used in the manufacturing process?
This bill's provisions are not clear on this point. For
example, would equipment used primarily in administration,
management, or marketing qualify for this exemption? Would
equipment used to clean the floor of a manufacturing
facility be exempt? To effectively administer this
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exemption, BOE needs clarification on the scope of the
exemption.
c) This bill should be amended to provide for a delayed
operative date. As a tax levy, the provisions of this bill
would become effective immediately. However, since
retailers generally rely on official notices of tax law
changes from the BOE, BOE recommends amending this bill to
provide for a delayed operative date. This would allow BOE
to provide proper advance notice of the exemption.
4)Committee Staff Comments:
a) Is the Proposed SUT Exemption for Business Purchases
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
AB 2280
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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) 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.
c) Technical Amendment : Committee staff recommends
deleting the word "exempt" on page 2, line 3, and replacing
it with "exempted".
d) 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 1812 (Silva) would create a partial SUT
exemption, operative January 1, 2011, for specified TPP.
AB 1812 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
heard in this Committee on May 3, 2010.
REGISTERED SUPPORT / OPPOSITION :
AB 2280
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Support
California Aerospace & Technology Association
California Manufacturers & Technology Association
California Taxpayers' Association
TechAmerica
Opposition
California State Association of Counties
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098