BILL ANALYSIS �
AB 204
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Date of Hearing: March 7, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 204 (Halderman) - As Amended: February 16, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: biomass energy
production
SUMMARY : Establishes a partial sales and use tax (SUT)
exemption for equipment purchased by a "biomass energy facility"
for use in its biomass energy production in this state.
Specifically, this bill :
1)Defines a "biomass energy facility" as a facility that engages
in the controlled combustion, when separated from other solid
waste, of any of the following materials for the purpose of
producing electricity or heat:
a) Agricultural crop residues;
b) Bark, lawn, yard, and garden clippings;
c) Leaves, silvicultural residue, and tree and brush
pruning;
d) Wood, wood chips, and wood waste; or,
e) Non-recyclable pulp or non-recyclable paper materials.
2)Provides that this exemption shall not apply to any tax levied
by a county, city, or district pursuant to, or in accordance
with, either the Bradley-Burns Uniform Local SUT Law or the
Transactions and Use Tax Law.
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
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this state.
2)Complimentary 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).
FISCAL EFFECT : The BOE estimates that this bill would result in
revenue losses of $1.3 million in fiscal year (FY) 2011-12, and
$2.6 million in FY 2012-13.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
I introduced Assembly Bill 204 in an effort to encourage
private sector green job growth in California's renewable
energy sector. Biomass energy is a smart investment
because it creates new jobs, sends less waste to landfills
and reduces the likelihood of fueling forest fires, all
while providing a renewable source of energy for our
growing population.
Biomass is a reliable and steady source of energy, and
every effort should be made to incentivize its production
in our state.
AB 204 is a modest tax exemption for those businesses that
would employ Californians and produce clean energy - two of
the state's most crucial goals. California is ambitious on
both fronts and AB 204 is a step in the right direction.
2)Proponents of this measure state:
AB 204 is a valuable tool in maintaining �the state's]
existing facilities, which is vital to California's clean
energy supply and to the health of our rural economy. Most
of these biomass power plants operate in rural communities,
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providing jobs and tax revenue, while efficiently
converting urban, forest, and agricultural waste into
energy, instead of dumping it in landfills or letting it
rot or burn in the open.
3)Opponents of this measure state:
While we appreciate the value of biomass energy and the
issue of sales tax on equipment, the full costs of this
energy are already paid for by ratepayers through rates
when utilities contract for this energy as part of their
renewable portfolio, or through the setting of feed-in
tariffs by the PUC. If those above-market payments are
insufficient to provide appropriate demand and utilization
of biomass, tax subsidies from the general fund should not
be required to make up the difference.
4)BOE notes the following in its staff analysis of this measure:
a) "Under existing law, as provided by SB 71 (Ch. 10,
Padilla, signed by the Governor on March 24, 2010 and
effective immediately), certain "projects" may be approved
for a state AND local sales and use tax exclusion by the
California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA). SB 71 amended Public
Resources Code (PRC) Section 26003 and added PRC Section
26011.8 to include within the definition of "project"
equipment used to manufacture products that produce energy
from alternative sources such as solar, wind, and biomass.
SB 71 allows CAEATFA to authorize a sales and use tax
exclusion for purchases of tangible personal property
utilized for the design, manufacture, production, or
assembly of advanced transportation technologies or
alternative source products, components, or systems, which
includes renewable energy equipment, combined heat and
power equipment, and alternative transportation equipment
in California."
b) "According to CAEATFA, because biomass facilities
manufacture an alternative source component (biomass),
these facilities may be eligible for the sales and use tax
exclusion under SB 71. The equipment must be used more
than 75 percent for the manufacture of an alternative
source component (biomass material). In addition, the
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project must meet all the other criteria in SB 71, such as
creating new, permanent jobs in California. According to
CAEATFA, there have been several projects approved for a SB
71 sales and use tax exclusion for new landfill gas power
facilities."
c) "According to the California Biomass Energy Alliance
�which] supports this bill, the existing biomass facilities
do not meet the criteria under SB 71 because they do not
create any new permanent jobs. In addition, there are
currently no new biomass energy facilities being built in
California. However, if a new biomass facility were to be
built, that facility's purchases of certain equipment would
be eligible for the SB 71 sales and use tax exclusion, as
long as the facility's project met the other criteria in SB
71."
d) "Currently, most sales and use tax exemptions apply to
the total applicable sales and use tax. However, there are
currently five partial exemptions in California law, where
only the state tax portion (6.25%: General Fund (6%) and
Fiscal Recovery Fund (0.25%)) of the state and local sales
and use tax rate is exempted. These five partial tax
exemptions include: (1) farm equipment and machinery, (2)
diesel fuel used for farming and food processing, (3)
teleproduction and postproduction equipment, (4) timber
harvesting equipment and machinery, and (5) racehorse
breeding stock. These partial tax exemptions are difficult
for both retailers and the Board. They complicate return
preparation and return processing. And errors on returns
attributable to these partial exemptions occur frequently,
which result in additional return processing workload for
the Board."
5)Committee Staff Comments:
a) What is a "Tax Expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. According to legislative
analyses prepared for prior related measures, United States
Treasury officials and some Congressional tax staff began
arguing in the late 1960's 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
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the form of foregone revenues). This bill would enact a
tax expenditure, in the form of a partial SUT exemption,
designed to encourage the production of biomass energy in
California.
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
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 in perpetuity without demonstrating any public
benefit. Second, there is generally no control over the
amount of revenue losses associated with any given tax
expenditure. Finally, the vote requirements for direct
expenditures and tax expenditures are different. While it
takes a two-thirds vote to make a budgetary appropriation,
a tax expenditure measure can be enacted by a simple
majority vote. It should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure. 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) Biomass in California : According to the California
Energy Commission, biomass consists of organic residues
from plants and animals, which are obtained primarily from
harvesting and processing agricultural and forestry crops.
At the peak of the biomass industry, there were 66
direct-combustion biomass facilities in operation in the
state. Today, there are roughly 30 such facilities with a
combined capacity of 640 megawatts.
d) Who Would Benefit from this Exemption? : This bill
creates a partial SUT exemption for equipment purchased by
a "biomass energy facility" for use in its biomass energy
production in this state. A biomass energy facility, in
turn, is defined as a facility that "engages in" the
controlled combustion of specified materials to produce
electricity or heat. Committee staff suggests amending
this bill to require that the qualifying facility be
primarily engaged in the activities specified. The failure
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to include such language in the prior Manufacturers'
Investment Credit led to many taxpayer disputes with BOE.
e) What Kind of "Equipment" Would Qualify for the
Exemption? : It is unclear what "equipment" would qualify
for the proposed exemption. Would qualifying equipment be
limited to equipment used directly in the controlled
combustion of materials? 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 biomass energy facility be exempt? To
effectively administer this tax expenditure program, BOE
needs clarification on the scope of the proposed exemption.
f) What Happens if the Exempt Equipment is Later used for
Non-Qualifying Purposes? : Under this bill, a biomass
energy facility could buy equipment that qualifies for the
exemption, use that equipment for a short period of time,
and then sell or transfer the equipment to another entity
(e.g., an affiliated out-of-state company). Committee
staff suggests amending this bill to eliminate the SUT
exemption if the purchased property is removed from
California or is used in a manner not qualifying for the
exemption.
g) Should this Bill be Amended to Provide a Sunset Date? :
As currently drafted, this bill lacks a sunset date. As
such, the SUT exemption would remain a permanent part of
the tax code absent a supermajority vote to repeal or
modify it. Many within the business community argue that
sunset dates reduce the level of certainty needed for
long-term planning purposes. Others, however, argue that
sunset dates provide the Legislature a much-needed
opportunity to review the efficacy of individual tax
expenditure programs in the future. Committee staff
suggests that this bill be amended to provide an
appropriate sunset date.
h) Related Legislation : Committee staff notes the
following related bills introduced in the 2009-10
Legislative Session:
i) AB 1719 (Harkey) would have established a partial
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SUT exemption for specified business equipment used in
either manufacturing or research and development. AB
1719 was held in this Committee.
ii) AB 1812 (Silva) would have established a partial SUT
exemption, operative January 1, 2011, for specified TPP
used in manufacturing. AB 1812 was held in this
Committee.
iii) AB 2280 (Miller) would have established a complete
SUT exemption for equipment a manufacturer purchases for
use in its manufacturing business in this state. AB 2280
was held in this Committee.
iv) AB 2525 (Blumenfield) would have established a SUT
exemption for TPP used in the manufacturing process of
clean energy technology, as specified. AB 2525's hearing
was cancelled at the request of the author.
i) Amendments Proposed by the Author : The author proposes
taking the following amendments to this bill in Committee:
i) Expand the Definition of a Biomass Energy Facility :
The author proposes expanding the definition of a biomass
energy facility to include any facility that produces
energy for distribution using "biomass materials."
Biomass materials, in turn, would be defined to include
any organic material not derived from fossil fuels,
including agricultural wastes. These amendments would
expand the exemption well beyond direct-combustion
facilities. For example, it would appear that these
amendments cover landfill gas, digester gas, and
municipal solid waste facilities.
ii) Limit the Scope of the SUT Exemption : Under the
proposed amendments, the partial SUT exemption would not
apply to the following components of the SUT:
(1) The 0.25% Fiscal Recovery Fund component;
(2) The 0.50% Local Public Safety Fund component;
and,
(3) The 0.50% Local Revenue Fund component.
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iii) Delay the Bill's Operative Date : The amendments
would delay the exemption's operative date to the first
day of the first calendar quarter commencing more than 90
days after the bill's effective date.
j) Suggested Technical Amendments : On page 2, line 3,
Committee staff suggests replacing the word "exempt" with
the word "exempted."
REGISTERED SUPPORT / OPPOSITION :
Support
California Biomass Energy Alliance
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098