BILL ANALYSIS
SB 832
Page 1
Date of Hearing: August 24, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
SB 832 (Environmental Quality Committee) - As Amended: July
13, 2009
2/3 vote. Urgency. Fiscal committee.
SENATE VOTE : 39-0
SUBJECT : California Pollution Control Financing Authority:
pollution control facilities: sales and use tax exclusion.
SUMMARY : Revises, under the tax-related provisions, the terms
"project" and "pollution control facility", as defined in the
California Pollution Control Financing Authority Act (Act), that
are eligible for the sales and use tax (SUT) exclusion and
includes public agencies in the definition of "participating
parties" that are eligible for financial assistance in
connection with the projects designed to control or eliminate
environmental pollution. Specifically, this bill :
1)Clarifies that one of the purposes of enacting the Act was to
provide industry within the state with an alternative method
for financing the acquisition or installation of facilities
for pollution control, provision of clean water, and
production of energy from alternative or renewable sources.
2)Modifies the terms "project" and "pollution control facility"
by defining those terms as, respectively, any land, building,
improvement thereto, work, real or personal property or
structure, vehicle, or equipment providing or designed to
provide for the control, reduction, abatement, elimination,
remediation, or prevention of pollution, improvement of air,
water, or soil quality, ensure the safe handling, recycling,
or disposal of materials that might otherwise be improperly
disposed of, or provide for environmental restoration,
cleanup, or enhancement. Provides that the definition of
"project" includes projects authorized under the Internal
Revenue Code (IRC) Section 142(a)(4), (5), (6), (8), (9),
(10), (12), or (14).
3)Amends the definition of "pollution" to include any natural or
SB 832
Page 2
manmade substance that must be removed to provide safe
drinking water.
4)Revises the definition of "participating parties" to include
public agencies.
5)States that the California Pollution Control Financing
Authority (CPCFA) may approve financing for projects where the
owner of the project enters into a lease or operating
agreement with another entity that will use the project and
both parties will be treated as "participating parties".
6)Specifies that, if the CPCFA refunds bonds or evidences of
indebtedness not originally issued by the CPCFA, it shall make
findings stating that the project being refinanced qualifies
as a "project" under the Act.
7)Provides that the CPCFA may also contract with any
participating party for the acquisition, and not just
construction, of a project by the participating party, and may
agree to pay the cost of the acquired project.
8)Takes effect immediately as an urgency measure.
EXISTING LAW :
1)Establishes the CPCFA with specified powers and duties, and
authorizes the CPCFA to approve financing for projects and
pollution control facilities to prevent or reduce
environmental pollution.
2)Imposes a sales tax on a retailer's gross receipts from the
retail sale of tangible personal property (TPP) in this state,
unless the sale is specifically exempt from taxation by
statute. It is presumed that gross receipts from a particular
sale of TPP are subject to tax, unless the seller can
establish either that the sale was not a retail transaction or
that the sale is subject to an exemption.
3)Exempts from the sales tax a "project" (or 'pollution control
facility'), as defined in the Act [Health and Safety Code
(H&SC) Division 27]. Specifically, Revenue and Taxation Code
(R&TC) Section 6010.10 provides that the terms "sale" and
"purchase" exclude both of the following:
SB 832
Page 3
a) A transfer of TPP, which constitutes a "project" or
"pollution control facility", to the CPCFA by any
participating party, when the transfer is made pursuant to
the Act.
b) A lease or transfer of TPP, which constitutes a
"project" or "pollution control facility", by the CPCFA to
any participating party, when the lease or transfer is made
pursuant to the Act.
4)Defines the terms "project", "pollution control facility", and
"participating party" by reference to H&SC.
5)Defines "project" or "pollution control facility" as,
respectively, any land, building, improvement thereto, work,
property or structure, real or personal, providing or designed
to provide for the control, reduction, abatement, elimination,
remediation, or prevention of pollution. (H&SC Section
44508). That definition also includes a payment by a party
for the party's share of the cost of remediation of pollution
at a contaminated site for which the party is a de minimis or
de micromis responsible party, provided that the party has
been accorded that status in a settlement with the United
States Environmental Protection Agency.
6)Defines the term "participating party" as any person, company,
corporation, partnership, firm, or other entity or group of
entities engaged in operations within this state that requires
financing, as specified, to aid and assist in the control,
remediation, or elimination of pollution of the environment of
the state. (H&SC Section 45006).
7)Excludes "public agencies" from the definition of
"participating party" and, thus, does not allow "public
agencies" to finance qualified projects with the CPCFA.
FISCAL EFFECT : Unknown.
COMMENTS :
1)Author's statement . The author states that, "This is the
Senate Environmental Quality Committee's omnibus measure. It
contains provisions to update, clarify and make
non-controversial changes to various programs to increase
effective program implementation. The codes governing the
SB 832
Page 4
Authority have not been updated since 1975. SB 832 conforms
and updates the governing code to reflect changes in business
practices and program updates."
2)The CPCFA. CPCFA is a public body created within the State
Treasurer's Office by the Act to provide low-cost innovative
financing to California businesses. CPCFA consists of three
members: the Director of Finance, the State Treasurer, and
the State Controller. CPFCA is authorized to issue either
tax-exempt or taxable bonds to finance projects that help
abate, eliminate, prevent, control, or reduce any form of
pollution of the earth, air or water, solid or liquid waste
disposal, thermal or noise pollution or radiation
contamination. Examples of recent assistance include projects
to purchase clean-air vehicles by waste companies, recycle
used oil, and develop construction and demolition debris
recycling programs. The total aggregate amount of bonds
issued by the CPCFA up to date is over $12 billion, of which
$3.9 billion are still outstanding.
In addition to the bond financing program, CPCFA also implements
and manages the California Capital Access Program (CalCAP),
Sustainable Communities Grant and Loan Program (SCGL), and the
California Recycle Underutilized Sites Program (CALReUSE).
The CalCAP program encourages banks and other financial
institutions to make loans to small businesses that fall
outside of most banks' convential underwriting standards.
Under this program CPCFA insures bank loans, up to $1.5
million, made by financial institutions to small businesses.
Loans may be used to finance the acquisition of land,
construction or renovation of buildings, the purchase of
equipment, and other capital projects.
The SCGL program is a financial assistance program to help
cities and counties in their community planning and
development efforts. Funding has been awarded to communities
that implement policies, programs and projects using
sustainable development principles. According to the CPCFA,
there are no plans for future funding rounds under the SCGL
program.
The CALReUSE program finances brownfield site assessment and
brownfield cleanup and promotes infill residential and
mixed-use development, consistent with regional and local land
use plans. Grants and loans are available up to $5 million
SB 832
Page 5
for eligible projects. This remediation program is funded by
Proposition 1C, the Housing Emergency Shelter Trust Fund Act
of 2006.
In addition to the CPCFA, the California Alternative Energy and
Advanced Transportation Finanicng Authority (CAEATFA) is
authorized to finance various projects involving production of
energy from non-fossil fuel or nuclear sources, or energy
conservation. Finally, the California Infrastructure and
Economic Development Bank has broad powers to act as a conduit
issuer of tax-exempt bonds for private users, but, as a policy
matter, it will not issue bonds for projects that are under
the jurisdiction of either CPCFA or CAEATFA.
Certain local government agencies, such as charter cities or
joint powers authorities could also issue pollution control
facility bonds.
3)Private Activity Pollution Control Bond Financing . Pollution
Control Bond Financing is a type of state or local government
financing where a state or local government entity issues
bonds or sells notes to provide the funds for various capital
costs for private businesses. Generally, a "private activity
bond" is any bond whose proceeds are used by, and the debt
service of which will be paid by, a private user. The Act
authorizes CPCFA to issue bonds, notes, bond anticipation
notes, and other obligations for any of the CPCFA's corporate
purposes, and to fund or refund any of those bonds or notes.
The purpose of this bond financing technique is to facilitate
low-cost financing to qualified pollution control projects
and, consequently, to ensure the protection of environment.
This type of financing is especially attractive and low cost
if the interest on the bonds is excludable from gross income
bondholders for federal income tax purposes. Before 1986, a
broad range of pollution control bond financing was done with
tax-exempt bonds. After 1986, the federal tax law was changed
to prohibit virtually all tax-exempt financing for "air and
water pollution control" facilities and to restrict the use of
other tax-exempt bonds for pollution control facilities.
Despite the loss of the federal tax exemption, there are still
potential benefits to using a taxable bonds finance structure
such as, for example, state subsidies for projects financed
with those bonds and an exemption from registration under the
federal Securities Act of 1933. In addition, the issuance of
taxable pollution control bonds is not subject to a state
SB 832
Page 6
volume cap, which applies to tax-exempt financing. Sometimes,
taxable bonds are structured as convertible bonds, so that
they may be "converted" from taxable to tax-exempt status when
volume cap is available.
4)State Volume Cap . As a "conduit issuer" of tax-exempt private
activity bonds, CPCFA is able to help finance a variety of
private projects in California to control pollution. Federal
tax law, however, imposes a limit on issuance of all private
activity bonds within each state, including exempt facilities
bonds, small issue bonds, single and multifamily housing
bonds, mortgage credit certificates and student loan bonds.
Bonds issued by local governments are also subject to the
state volume cap. The 2009 cap in California is about $3.3
billion, of which approximately $547 million has already been
allocated. The state cap is controlled and distributed by the
California Debt Limit Allocation Committee (CDLAC), a
three-member agency, consisting of the State Treasurer, as
Chairman, the State Controller, and the Director of Finance.
5)What is an "eligible project"? The current definition of a
"project" or "control pollution facility" is over 275 words
and results from 36 years of amendments and modifications.
(R&TC Section 44508). Generally, land, buildings, real or
personal property or structure providing or designed to
provide for the control, reduction, abatement, elimination,
remediation, or prevention of pollution qualify as an eligible
"project" or "pollution control facility". The existing
definition includes numerous examples of facilities,
equipment, and property that qualify as eligible "projects" or
"pollution control facility". The sponsor states that the
current definition is convoluted and does not reflect
contemporary thinking about the sorts of projects that
constitute environmental hazards or which would further other
state policies.
This bill deletes the examples of various equipment or
facilities that qualify as eligible projects and, instead,
creates a new definition of a "project" (or 'pollution control
facility') that includes any land, building, work, real or
personal property or structure, vehicle, or equipment that:
a) Provide or are designed to provide for the control,
reduction, abatement, elimination, remediation, or
prevention of pollution or improvement of air, water, or
SB 832
Page 7
soil quality;
b) Ensure the safe handling, recycling, or disposal of
materials that might otherwise be improperly disposed of;
or,
c) Provide for environmental restoration, cleanup, or
enhancement.
The new definition further seeks to clarify that CPCFA can
assist projects that improve the environment where tax-exempt
financing is permitted by federal tax law. Specifically, it
provides that eligible projects include, but are not limited
to, any projects that are authorized pursuant to IRC Section
142(a)(4) (facilities for the furnishing of water), (5)
(sewage facilities), (6) (solid waste disposal facilities),
(8) (facilities for the local furnishing of electric energy or
gas), (9) (local district heating or cooling facilities), (10)
(qualified hazardous waste facilities), (12) (environmental
enhancements of hydroelectric generating facilities), or (14)
(qualified green building and sustainable design projects).
Finally, the new definition excludes certain payments for the
cost of remediation of pollution at a contaminated site that
currently qualify as "projects".
6)Federal Tax-Exempt Facility Bonds Law . Federal tax law
provides that interest on any obligation issued by, or on
behalf of, any state or political subdivision is excluded from
gross income [IRC Section 103(a)]. However, it limits this
exemption in the case of private activity bonds [IRC Section
103(b)]. But, certain facilities may be financed with
tax-exempt bonds. For example, IRC Section 142 exempts from
tax interest on private activity bonds that are issued to
finance specified facilities, including a sewage and solid
waste disposal facility, a hazardous waste facility, a water
furnishing facility, a facility for the local furnishing of
electric energy or gas, a local district heating or cooling
facility, environmental enhancements of hydroelectric
generating facilities and, recently, qualified green building
and sustainable design projects. SB 832 incorporates those
facilities within the definition of eligible "project" or
"pollution control facility".
7)Public agencies as participating parties . The term
SB 832
Page 8
"participating party" is defined as any person, company,
corporation, partnership, firm or other entity engaged in
operations within this state that requires financing pursuant
to the Act. However, currently, public agencies are not
considered to be "participating parties" and, thus, cannot
qualify for this special financing otherwise available to
various private entities. This bill adds public agencies to
those who can benefit from CPCFA financing or act as
intermediaries to assist private companies use CPCFA's tools.
The term "public agency" means any state agency, board, or
commission, any county, city and county, city, regional
agency, public district, or other political subdivision.
(H&SC Section 44509). Although many agencies are able to
obtain financing on their own, according to the sponsor, there
is an increasing interest in aggregation of financings and
there will be more joint projects involving public and private
entities. Further, it is expected that state and local
agencies may need help in accessing increasingly complex
tax-credit bonds and other creative financings. For example,
recently, the CAEATFA has facilitated a tax-exempt financing
for the California Department of Transportation and is
currently working on other financing projects involving local
governments.
8)The revised definition of "pollution". Currently, the term
"pollution" is defined as an alteration of the quality of the
environment. SB 832 would expand that definition to include
any natural or manmade substance that must be removed to
provide safe drinking water.
9)A newly qualified project . Under existing law, the CPCFA may
refinance its bonds, notes or other evidence of indebtedness.
[H&SC Section 44545 (a)]. However, it may not refinance bonds
issued by other agencies. According to the sponsor, a
borrower, at times, finds it desirable to move its bonds to
another agency. For example, the borrower may have reasons to
refund their older bonds and, at the same time, would like to
take advantage of current interest rates or other items. SB
832 provides that CPCFA can refinance (known as refunding),
directly or indirectly, pollution control-related bonds of any
public agency. This bill also directs the CPCFA, in the case
it refinances bonds issued by another agency, to make findings
that the project that is being refinanced qualifies as a
"project" under the Act. Presumably, a newly qualified
project would be eligible for the sales tax exclusion. What
SB 832
Page 9
is unclear, however, is whether the state would have to refund
the sales tax paid, if the newly qualified project was not an
"eligible project" prior to the refinancing. For instance, if
a public agency originally issued bonds to finance a project
that now qualifies as "eligible project" for purposes of the
sales tax exclusion, and the CPCFA refinances the bond, could
the user of the project apply for a refund of the sales tax?
The Committee may wish to consider amending this bill to
clarify that "newly qualified projects" are not eligible for
the sales tax exclusion.
10)The use of bond proceeds. The Act provides that bond
proceeds may be used to pay for virtually all costs incurred
by the user for the project, including land and any interests
in property, buildings, fixtures, machinery, equipment,
furnishings, landscaping, all costs for architects, engineers,
surveyors, attorneys, permits, and other incidental costs, all
costs of the financing, and issuance of the bonds. An
eligible project may be "for construction of a new facility,
expansion of an existing facility, rehabilitation or
replacement of part or all of an existing facility or its
equipment, or acquisition and installation of new equipment."
(Introduction to Pollution Control Financing in California, R.
Feyer, Orrick, Herrington & Sutcliffe LLP, April 2006, p. 5).
SB 832 appears to allow the CPCFA to contract with a
participating party not just for the construction but also the
acquisition of a project and, thus, would expand the types of
eligible projects.
11)Does SB 832 expand the existing sales tax exclusion for
qualified projects and pollution control facilities ? Under
existing SUT law, a transfer of TPP, which constitutes a
"project" or "pollution control facility", between the CPCFA
and any participating party, qualifies for the sales tax
exclusion, when the transfer is made pursuant to the Act. The
sales tax exclusion was first created through an uncodified
section in AB 3750, Chapter 1384, Statutes of 1976, but later
a separate section was added to the Revenue and Taxation Code
to codify this exclusion.
SB 832 changes the existing definition of "project" and
"pollution control facility" to include a few types of
projects that, arguably, are not "eligible projects" under
SB 832
Page 10
existing law. For example, desalination water facilities,
environmental enhancements of hydroelectric generating
facilities, local district heating or cooling facilities, and
facilities for the local furnishing of electric energy or gas
do not seem to fall within the existing definition of
"project" and "pollution control facility". Additionally, by
expanding the existing definition of "participating party" to
include public agency, SB 832 allows the projects financed by
local governments to qualify for the sales tax exclusion as
well. Finally, as discussed, SB 832 appears to allow the
CPCFA to contract with a participating party not just for the
construction but also the acquisition of a project and, thus,
would expand the types of eligible projects. Consequently, SB
832 could potentially result in a direct state and local SUT
revenue loss. As noted by the Board of Equalization (BOE)
staff in its analysis of SB 832, the extent of that revenue
loss depends on the number of new projects approved by the
CPCFA pursuant to this bill and the dollar amount of
machinery, equipment or other TPP sold, leased or transferred
pursuant to R&TC Section 6010.10.
Committee staff notes that, according to the CPCFA, the
financing of eligible projects is done primarily via
tax-exempt private activity bonds and, so far, no project has
been structured to qualify for the sales tax exclusion. In
fact, it appears that no sales tax exclusion has ever been
claimed by any participating party since the exclusion was
enacted. Typically, in order to qualify for the exclusion,
the participating party would have to purchase the property
without payment of tax and then resell the equipment to the
CPCFA. The transfer would be excluded from the SUT as a
transfer from a participating party to CPCFA. The
participating party and the CPCFA would then enter into a
lease agreement and upon complete installation of the TPP,
ownership of that property would be transferred from the CPCFA
to the participating party. Alternatively, the CPCFA could
purchase the specified equipment on behalf of the
participating party, financing the purchase through a bond or
loan, and the participating party would lease the equipment
from the CPCFA. As the purchaser of the equipment, the CPCFA
will pay no sales tax on the purchase, nor will it be required
to collect the use tax on the lease receipts. According to
the sponsor, participating parties are primarily interested in
obtaining low-cost tax-exempt financing rather than qualifying
for the sales tax exclusion, as it requires entering into one
SB 832
Page 11
of the complicated sale-lease transactions that may not be
feasible for business reasons.
The sponsor believes that SB 832 would not significantly change
the structure of future projects, and, most likely, would not
result in any additional claims for the sales tax exclusion.
12)This bill was double-referred with the Committee on Natural
Resources and passed out of that committee by a vote of 9 to 0
on July 6, 2009. For a more comprehensive
discussion of this bill, refer to that committee's analysis.
13)Similar legislation . AB 1111 (Blakeslee), introduced in the
current legislative session, would have expanded the
definition of "project" in the Public Resources Code for
purposes of authorizing the CAEATFA to provide bond financing
to participating parties for "alternative source components".
AB 1111 was held under submission by the Assembly
Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098