BILL ANALYSIS �
AB 1941
Page 1
Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1941 (Ma) - As Amended: March 29, 2012
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Taxation: qualified heavy equipment
SUMMARY : Imposes, on or after January 1, 2013, a tax on every
"qualified lessee" of "qualified heavy equipment" (QHE) at the
rate of 1.25% of the "qualified lessee's" gross receipts from
the lease or rental of QHE. Specifically, this bill :
1)Provides that, for the 2013-14 fiscal year (FY) and each FY
thereafter, this tax shall be imposed in lieu of any property
tax on QHE.
2)Defines a "qualified lessee" as a lessee that leases or rents
"QHE" from a "qualified lessor."
3)Defines "QHE" as construction, earthmoving, or industrial
equipment that is mobile, including, without limitation, all
of the following:
a) A self-propelled vehicle that is not designed to be
driven on the highway;
b) Industrial electrical generation equipment;
c) Industrial lift equipment; and,
d) Industrial material equipment.
4)Defines a "qualified lessor" as a lessor that satisfies all of
the following conditions:
a) The lessor's principal business is the short-term lease
or rental of QHE;
b) An unspecified percentage of the total gross receipts of
the qualified lessor's business is derived from the lease
or rental of QHE; and,
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c) The lessor is engaged in a line of business "described
in NAICS Industry 532412 of the North American Industry
Classification System published by the United States Office
of Management and Budget, 2012 edition."
5)Defines "leasing or renting" as a short-term lease or rental
for a period of 365 days or less.
6)Requires the qualified lessor to collect the tax on each lease
or rental of QHE and remit the tax to the State Board of
Equalization (BOE).
7)Charges the BOE with administering and collecting the tax
pursuant to the Fee Collection Procedures Law �Revenue and
Taxation Code Section 55001 et seq.].
8)Authorizes the BOE to adopt and enforce regulations relating
to the tax's administration and enforcement.
9)Provides that the taxes imposed shall be due and payable to
the BOE on or before the last day of the month following each
quarterly period.
10)Provides that all revenues, interest, and penalties collected
shall be deposited in the Heavy Equipment Revenue Fund (Fund),
which this bill establishes in the State Treasury. Upon
legislative appropriation, Fund revenues shall be used to
reimburse "local entities" for their lost property tax
revenues.
11)Defines "local entity" as a city, county, and special
district.
12)Provides that, notwithstanding existing law, the state shall
not reimburse local agencies for property tax revenues lost
pursuant to this bill.
13)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Provides that all property is taxable absent a specific
constitutional or statutory exemption.
2)Authorizes the Legislature to classify personal property for
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differential taxation or for exemption by means of a statute
approved by a 2/3 vote of the membership of each house.
3)Requires the state to reimburse local agencies and school
districts for certain costs mandated by the state.
4)Requires the Legislature to reimburse local agencies annually
for certain property tax revenues lost as a result of any
exemption or classification of property for purposes of ad
valorem property taxation.
FISCAL EFFECT : The BOE's revenue estimate for this bill is
pending.
COMMENTS :
1)According to the author's office, some heavy equipment rental
companies contend that subjecting heavy equipment to personal
property taxation results in both unfairness and
"administrative inconsistencies." Specifically, the author's
office notes that rental companies with multiple locations in
the state are subjected to numerous audits each year in
different jurisdictions. In addition, the author's office
states that different County Assessors use different methods
for valuing mobile construction equipment.
In its current form, this bill would address these concerns by
permanently exempting QHE from property taxation and by
imposing an "in lieu" tax on the lessees of QHE. However, in
light of the numerous policy and administrative concerns
raised in connection with this proposal, the author's office
has committed to replacing the bill's current language with
language requiring the Legislative Analyst's Office (LAO) to
assess the "in lieu" tax proposal and to report its
recommendations to the Legislature on or before July 1, 2013.
2)Opponents of this bill state:
�T]he bill as drafted appears to shift a tax burden from
the owners' heavy construction equipment to licensed
contractors. Currently, the costs of personal property
taxes paid by the heavy equipment owner are embedded in the
rental charge. Depending on the competitiveness of the
local market, those taxes may be wholly passed along to the
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person renting the equipment or partially absorbed by the
equipment owner. The practical effect of �this] bill would
be to allocate the entire incidence of the tax to those
persons, mostly licensed contractors, who frequently lease
or rent backhoes, excavators, graders, and other heavy
construction and earth-moving equipment.
In addition, we note that the owner of heavy equipment can
depreciate the capital cost over time, thereby reducing the
assessed value of the property and gradually lowering the
dollar amount of the property tax the owner pays. Because
gross rental charges typically increase over time, AB 1941
would likely result in increased tax revenues to the state
over the useful life of the equipment. Not only would this
change result in higher costs to contractors renting
construction equipment, it could give equipment owners a
windfall profit if the rental fees they charge are not
reduced to reflect the tax savings on the equipment they
already own.
Needless to say, California's construction industry has
been hit hard by the recession. Margins in construction
are extremely thin and even small increases in costs of
construction can make the difference in a project being
profitable. Higher equipment leasing costs will need to be
passed along to property owners - including state and local
governments - when they contract for infrastructure
improvements.
In summary, we are unaware of any deficiencies in current
practices and procedures that justify treating the taxation
of heavy equipment differently than other types of personal
property.
3)Committee Staff Comments
a) California's property tax : Personal property used in a
trade or business is generally taxable, and is valued each
lien date (i.e., January 1) at its current fair market
value. The tax rate applied to personal property is the
same as that applied to real property - 1% plus voter
approved indebtedness, which varies by locality.
Existing law provides a "business inventory exemption" for
personal property intended for rental or lease in the
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ordinary course of business that is not leased or rented on
the January 1 lien date. In other words, if the property
is not rented or leased on that particular day (i.e., it is
returned to inventory), the property is exempt from
taxation for the ensuing FY.
b) The distribution of property tax revenues : Generally,
property tax revenues are allocated according to the
property's "situs" and accrue only to those taxing
jurisdictions in the tax rate area where the property is
located. Pursuant to Property Tax Rule 204, property
leased or rented on a daily, weekly or other short-term
basis of six months or less, has situs at the place where
the lessor normally keeps the property. Temporary absences
from that location do not change the situs of the property.
The situs of property leased or rented for an extended,
but unspecified, period or leased for a term of more than
six months is determined on the basis of the lessee's use.
c) The current proposal : Some heavy equipment rental
companies contend that subjecting heavy equipment to
personal property taxation results in both unfairness and
"administrative inconsistencies." Specifically, the
author's office notes that rental companies with multiple
locations in the state are subjected to numerous audits
each year in different jurisdictions. In addition, the
author's office states that different County Assessors use
different methods for valuing mobile construction
equipment. In its current form, this bill would address
these concerns by permanently exempting QHE from property
taxation and by imposing an "in lieu" tax on the lessees of
QHE. Numerous concerns with this proposal, however, have
been raised by both interested parties and by the BOE's
staff analysis of this bill. For example, the BOE notes
the following:
i) "The bill defines "heavy equipment" to mean
construction, earthmoving, or industrial equipment that
is mobile. The bill further provides examples of such
equipment, such as industrial lift or material equipment
and industrial electrical generation equipment. However,
in order to clearly identify the sorts of property that
would be subjected to the proposed tax, it is suggested
that a more comprehensive definition of "mobile" be
provided in the bill consistent with the author's
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intent."
ii) "The bill would impose the tax on the gross receipts
from the lease or rental of the equipment. Since "gross
receipts" could include a variety of charges, such as
applicable use tax, late charges and interest for
untimely rental payments, insurance charges, charges for
damages to the property, insufficient fund fees, etc.,
the bill should provide a specific definition consistent
with the author's intent."
iii) "Since the bill imposes the tax on the lessee, would
the tax apply if the lessee uses the equipment outside
this state? If a lessor is out-of-state, but the
equipment is leased to a lessee in California, would the
lessor be required to collect the tax?"
d) Proposed amendments : To address these and numerous
other concerns raised in connection with this bill, the
author has committed to taking amendments deleting the
bill's current provisions and replacing them with
provisions requiring an LAO study of the "in lieu" tax
proposal. Specifically, the LAO would be required to
assess the tax law changes proposed in the current version
of this bill and make recommendations on both of the
following:
i) Whether the complications associated with the
property taxation of QHE would be eased by exempting QHE
from property taxation, and by instead imposing a tax
upon qualified lessees; and,
ii) How the changes proposed in the current version of
this bill could be achieved in a revenue neutral manner.
These recommendations would be issued in a report to the
Legislature, the Senate Committee on Governance and
Finance, and this Committee on or before July 1, 2013.
Should this bill be voted out of this Committee in its
current form, the author would take the amendments outlined
above in the Appropriations Committee, so as not to
jeopardize the bill by removing its "tax levy" designation
after the fiscal deadline.
AB 1941
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REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
Associated General Contractors
California Chapter of the American Fence Association
California Fence Contractors' Association
California Landscape Contractors Association
California Railroad Industry
Engineering Contractors' Association
Flasher Barricade Association
Marin Builders Association
United Contractors
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098