BILL ANALYSIS �
AB 81
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Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 81 (Beall) - As Amended: March 23, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemptions: fuel and petroleum
products: air common carriers
SUMMARY : Provides a partial sales and use tax (SUT) exemption
for fuel and petroleum products sold to or purchased by an air
common carrier (ACC) for consumption or shipment in the conduct
of its business as an ACC, on a domestic flight. Specifically,
this bill :
1)Exempts gross receipts exceeding the average spot price per
gallon over the previous five fiscal years (FYs).
2)Provides that the exemption shall apply "�o]n and after
January 1, 2012, and before December 31, 2019."
3)Specifies that, for the 2011-12 FY, the State Board of
Equalization (BOE) shall, on or before October 1, 2011,
determine the average spot price over the previous five FYs,
per gallon, derived from the sale in this state of, or the
storage, use, or other consumption in this state of, fuel and
petroleum products sold to or purchased by an ACC for
consumption or shipment in the conduct of its business as an
ACC, on a domestic flight.
4)Specifies that, for the 2012-13 FY and each FY thereafter, BOE
shall, on or before March 1 preceding that FY, determine the
average spot price over the previous five FYs.
5)Defines an "ACC" by reference to Business and Professions Code
Section 23046 to mean a person engaged in regularly scheduled
air transportation between fixed termini under a certificate
of public convenience and necessity.
6)Defines a "domestic flight" as a flight whose final
destination is a point inside of the United States (U.S.),
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including its territories.
7)Requires any exemption-claiming ACC that is not already
required to hold a seller's permit to register with BOE and
obtain a fuel exemption registration number. Such ACCs shall
also be required to file appropriate returns if BOE notifies
the ACC that returns must be filed or if the ACC is liable for
taxes based upon consumption or transportation of fuel
erroneously claimed as exempt.
8)Requires any exemption-claiming ACC, upon request, to make
available to BOE records documenting its consumption or
transportation of fuel and the amount claimed as exempt.
9)Provides that BOE may require any exemption-claiming ACC to
place with it such security as BOE may determine pursuant to
existing law.
10)Provides that, notwithstanding existing law, the exemption
shall not apply to any tax levied by a county, city, or
district pursuant to either the Bradley-Burns Uniform Local
SUT Law or the Transactions and Use Tax Law, unless approved
by the local government that would otherwise receive the
revenues.
11)Provides that the governing body of any county, city, or
district may enact an ordinance authorizing the exemption, and
shall notify BOE of this action on or before December 1, 2011.
12)Provides that on January 1, 2013, and annually thereafter,
BOE shall submit a report to the Legislature setting forth the
state fiscal impact of the exemption.
13)Specifies that the exemption provisions shall be repealed on
January 1, 2017, unless the Employment Development Department
(EDD) makes a finding before that date that 2,000 or more jobs
have been created as a result of the exemption, in which case
the exemption shall remain in effect until January 1, 2020.
14)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for SUT revenues lost under
this bill.
15)Takes immediate effect as a tax levy.
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EXISTING LAW :
1)Imposes a 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)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
BOE.
3)Provides a sales tax exemption for TPP, other than fuel and
petroleum products, sold to common carriers when that property
is shipped to a point outside the state under specified
conditions.
4)Provides a SUT exemption for fuel and petroleum products sold
to an ACC for immediate consumption or shipment in the conduct
of its business on an international flight.
FISCAL EFFECT : The BOE estimates that this bill would result in
revenue losses of $54.3 million in FY 2011-12 and $108.8 million
in FY 2012-13. However, BOE also notes that, due to the recent
volatility in oil prices, this bill is likely to result in a
higher revenue impact.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Rather than looking to airlines and their passengers to
fund programs that are clearly government functions,
California should take the lead in rationalizing aviation
charges. Airlines need to be provided a stable and
efficient fee and tax structure, as the domestic passenger
aviation system is a key to the state's economic
competitiveness.
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Jet fuel is an airline's second largest expense, as it
makes up a substantial portion of an airline's total costs.
A significant amount of jobs in the state depend on the
business provided by the services of the airline industry.
Domestic airline carriers must be provided a predictable
structure of fees and taxes in order for airlines to
schedule more passenger flights to and from California.
2)Proponents state, "The bill would impose a cap on the price of
commercial aviation jet fuel subject to the state sales and
use taxes. The cap would be set at the average per gallon
over the preceding five years. By setting a cap based on
average prices, the bill attempts to ensure that the State
will receive a more consistent revenue stream, while partially
protecting the airlines from wild increases in fuel prices."
3)Opponents state, "The state is in a multibillion-dollar budget
deficit and cannot afford to provide a tax exemption to
airline companies at this time. We also do not see a tax
policy justification for providing a special fuel tax break to
airline companies relative to all other state taxpayers. Fuel
prices continue to be volatile and the state can't afford
these tax breaks while fuel prices continue to rise."
4)BOE has provided the following comments in its staff analysis
of this bill:
a) All air common carriers wouldn't be treated alike .
"This bill defines an air common carrier by referencing
Business and Professions Code Section 23046. This section
defines "air common carrier" to mean "a person engaged in
regularly scheduled air transportation between fixed
termini under a certificate of public convenience and
necessity issued by the Civil Aeronautics Board, or its
successor, or the Public Utilities Commission, or its
successor . . . ." This definition is used in terms of the
applicability of alcoholic beverage licensing laws to air
common carriers selling distilled spirits on board
airplanes operating in this State.
"The BOE, however, has defined "air common carrier" for
purposes of the sales and use tax exemptions currently
applicable to these persons through its Regulation 1621,
Sales to Common Carriers. This regulation defines common
carriers to include carriers such as those defined in this
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bill as well as other carriers, such as charter carriers,
private carriers, or contract carriers, so long as they are
engaged in the business of transporting persons or property
for hire or compensation and offer these services
indiscriminately to the public or some portion of the
public. Is it appropriate to have two different
definitions in law for the same term? This could add
confusion in the proper reporting of those sales to
carriers that remain subject to tax."
b) The local government option, if exercised, would
eliminate the uniform base of local and district taxes .
"The bill would allow local governments to opt into the
proposed exemption if they vote to do so. If no local
governments opted into the proposed exemption, sales of
fuel and petroleum products would be exempt at the rate of
6.25% (the state rate of 5.25%, the 0.5% Local Revenue Fund
rate, and the 0.5% Local Public Safety Fund rate). All
sales made within jurisdictions imposing a district tax
would be subject to only the district tax rate.
"However, if local governments opt into the exemption,
California would be left with a variety of differing rates
on sales of fuel and petroleum products. Some practical
questions would arise as well. For example, if a city
doesn't opt into the exemption for its Bradley-Burns tax
(0.5%), but a county does (0.75%), does the entire
Bradley-Burns tax then go to the county within the city
limits? That is, would the offsetting city credit
disappear?
"In addition to the likelihood of increased errors on sales
and use tax returns, there would be an added burden placed
on the retailers making the sales. The retailers receive
no direct economic benefit from the proposed exemption, yet
the retailers would be required to (1) program their
computers to allow for a separate rate for the fuel sold to
air carriers on a domestic flight versus all other fuel and
petroleum product sales, (2) obtain and retain necessary
documentation to support any exempt sales to qualifying
carriers, and (3) account for the exempt sales for purposes
of properly reporting their sales and use tax obligations
to the BOE."
c) The proposed definition of "domestic flight" and current
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law's definition of "international flight" geographically
overlap . "The bill would define "domestic flight" as a
flight whose final destination is a point inside the United
States, including its territories. Territories of the
United States would include all of the following:
--------------------------------------------------------
|Guam |American Samoa |
|----------------------------+---------------------------|
|Midway Islands |Baker Island |
|----------------------------+---------------------------|
|Navassa Island |Federated States of |
| |Micronesia |
|----------------------------+---------------------------|
|Northern Mariana Islands |Howland Island |
|----------------------------+---------------------------|
|Palmayra Atoll |Jarvis Island |
|----------------------------+---------------------------|
|Puerto Rico |Johnston Atoll |
|----------------------------+---------------------------|
|U.S. Virgin Islands |Kingman Reef |
|----------------------------+---------------------------|
|Wake Island | |
--------------------------------------------------------
"As stated earlier, current Section 6357.5 provides an
exemption for the sale or purchase of fuel and petroleum
products sold to air common carriers when the fuel and
petroleum products are for immediate consumption or
shipment in the conduct of the air carrier's business on an
international flight. "International flight" is defined to
mean a flight whose final destination is a point outside
the United States. If enacted, these provisions would
conflict, since the above territories are considered
outside the United States. So, is it the author's intent
that fuel purchased by an air common carrier for a flight
that has a final destination to Guam be fully exempt as
provided by current law, or partially exempt under the
provisions of this bill?"
d) Does the average spot price as determined by the BOE
take effect on a calendar of fiscal year basis? "As a tax
levy the bill is effective immediately, but the exemption
would not be operative until January 1, 2012. The BOE
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would make a determination of the average spot price for
the 2011-12 fiscal year on or before October 1, 2011. The
rate would be determined using fiscal year information, but
would not take effect until the beginning of the calendar
year.
"Additionally, the BOE would be required to determine the
average spot price for the 2012-13 fiscal year, and each
fiscal year thereafter, on or before March 1 preceding that
fiscal year. Again, the rate would be determined by March
1, 2012, using fiscal year information, but would not take
effect until January 1, 2013. If the author intended for
the average spot price to be effective on a fiscal year
basis, then this should be clarified."
e) Sunset date extension is contingent on airline industry
creating 2,000 jobs . "This exemption will be repealed by
January 1, 2017, unless the EDD makes a finding on or
before January 1, 2017, that 2,000 jobs have been created
as a result of this exemption. If EDD makes the finding,
then the sunset date for the exemption is extended to
January 1, 2020. The author may wish to specify that the
EDD make a report to the Legislature, or to Department of
Finance, on or before October 1, 2016, otherwise, the BOE
and fuel suppliers and the air common carrier industry may
have very short notice regarding the expiration or
continuation of the exemption."
5)Committee Staff Comments :
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960's, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures," since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues). This bill would
enact a tax expenditure, in the form of a partial SUT
exemption for aviation fuel and petroleum products,
designed to aid California's domestic aviation sector.
b) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
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differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
it should also be noted that, once enacted, it generally
takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
c) Background : Prior to July 15, 1991, fuel and petroleum
products sold to air, water, and rail common carriers were
exempt from sales tax when used in the conduct of the
carriers' activities after the first out-of-state
destination. This exemption was designed to make
California's ports and airports more competitive, and it
established consistency for interstate and foreign commerce
sales by exempting that portion of fuel transported outside
of California prior to use. This exemption was repealed as
a result of a budget crisis in 1991.
The BOE notes that the exemption was restored in 1992, but
only with respect to water common carriers, and only until
January 1, 1998. The sponsor of this legislation, the
Pacific Merchant Shipping Association, successfully argued
that the July 1991 exemption repeal had caused a decline in
the number of ships bunkering in California ports. The
January 1, 1998 sunset date was later extended by
subsequent legislation. Currently, these provisions are
scheduled to sunset on January 1, 2014.
Finally, BOE notes:
Two bills to restore the exemption for air and rail
common carriers were introduced in the 1996
Legislative Session. AB 3375 (Olberg) would have
restored the exemption for rail common carriers. AB
566 (Kaloogian) would have restored the exemption for
air common carriers. According to a Department of
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Finance analysis of AB 566, "Governor Wilson has
proposed a different form of tax relief for the
aircraft industry. Under the Governor's proposal, a
sales tax exemption would be extended to property that
becomes a component part of an exempt aircraft as a
result of maintenance, repair, overhaul, or
improvement of the aircraft in compliance with FAA
requirements." The Governor's proposal was actually
enacted in the 1996 Legislative Session by SB 38
(Lockyer, et al., Stats. 1996, Ch. 954) which, among
other things, included the sales tax exemption for the
component parts.
d) Is there a good reason to treat water common carriers
and ACCs differently? : It is unknown whether a reduction
in the sales tax burden would actually impact ACC fuel
purchasing decisions. Some have argued that, unlike water
common carriers whose capacity to store and carry fuel is
significantly greater than the amount consumed on fixed
trips, ACCs are more likely to purchase the quantity of
fuel needed for each stage of a flight. Exemption
proponents, however, argue that California's current sales
tax regime causes ACCs to "ferry" or "tanker" fuel into the
state. Ferrying or tankering refers to the practice of
carrying more fuel than is necessary to reach a given
destination in order to reduce the amount of fuel purchased
at that destination.
e) Suggested technical amendments : Committee staff
suggests the following technical amendments:
i) On page 2, line 4, replace "December 31, 2019" with
"January 1, 2020";
ii) On page 2, line 5, insert "the" before "gross
receipts"; and,
iii) On page 2, line 5, insert "or sales price" before
"in excess of".
f) Related legislation : Over the past several years, there
have been at least five other bills that would have
provided a similar SUT exemption for fuel and petroleum
products used on domestic flights:
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i) SB 98 (Committee on Budget and Fiscal Review), of
the 2007-08 Legislative Session, would have provided a
partial SUT exemption for fuel and petroleum products
sold to
or purchased by an ACC for use on a domestic flight, as
specified. SB 98 died on the Senate inactive file.
ii) SB 359 (Runner), of the 2007-08 Legislative Session,
would have provided a partial SUT exemption for fuel and
petroleum products sold to or purchased by an ACC for use
on a domestic flight, as specified. SB 359 was never
heard in committee.
iii) SB 1619 (Dutton), of the 2005-06 Legislative
Session, would have provided a partial SUT exemption for
fuel and petroleum products sold to or purchased by an
ACC for use on a domestic flight, as specified. SB 1619
died in the Senate Committee on Revenue and Taxation.
iv) AB 236 (Bermudez), of the 2005-06 Legislative
Session, would have provided a partial SUT exemption for
fuel and petroleum products sold to or purchased by an
ACC for use on a domestic flight, as specified. AB 236
was held in this Committee.
v) AB 2897 (Wiggins), of the 2001-02 Legislative
Session, would have provided a partial SUT exemption for
fuel and petroleum products sold to or purchased by an
ACC. AB 2897 was held in the Assembly Appropriations
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Air Transport Association of America
Alaska Airlines
American Airlines
Southwest Airlines
United Airlines
US Airways
Opposition
California Tax Reform Association
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Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098