BILL ANALYSIS �
AB 2656
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Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2656 (Charles Calderon) - As Amended: May 7, 2012
Majority vote. Tax levy. Fiscal committee.
SUBJECT : California Transportation Authority: tax credit
certificates for exporters and importers: income tax credits.
SUMMARY : Authorizes the California Transportation Financing
Authority (Authority) to award $500 million in tax credit
certificates to exporters and importers, as defined, for the
specified increases in cargo tonnage or value, net increases in
the number of qualified full-time employees hired in California,
or capital investment in a cargo facility. Specifically, this
bill :
1)Contains legislative findings relating to the international
trade and competitiveness of California's ports and declares
the legislative intent to boost exports and imports through
California ports and airports by providing tax incentives for
California importers and exporters.
2)Authorizes the Authority to award a tax credit certificate or
certificates to an exporter or importer that demonstrates to
the satisfaction of the Authority that, in a taxable year
beginning on or after January 1, 2013, and before January 1,
2018, it met any of the following requirements:
a) Has increased its export or import:
i) Cargo tonnage, whichever is applicable, through
California ports by at least 5% over its export or import
cargo tonnage, respectively, for the preceding taxable
year; or,
ii) Cargo value, whichever is applicable, through
California airports by at least 5% over its export or
import cargo value, respectively, for the preceding
taxable year.
b) Has exported or imported through California ports
export or import:
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i) Cargo tonnage in excess of $400,000, provided it did
not export or import cargo through California ports in
the preceding taxable year; or,
ii) Cargo with cargo value in excess of $250,000,
provided it did not export or import cargo through
California airports in the preceding taxable year.
c) Had a net increase, as specified, in the number of
qualified full-time employees hired in California during
the taxable year.
d) Has incurred capital costs for a cargo facility
constructed in California during the taxable year.
3)Requires the Authority to do all of the following:
a) Establish a procedure for applicants to apply for the
tax credit certificates and a process to award those
certificates on a first-come-first-served basis;
b) Determine the information necessary to be provided by an
applicant to the Authority;
c) Develop and provide application forms for use by
applicants;
d) Establish and charge fees in the amount sufficient to
cover all of its costs;
e) Deposit the fees in the Job and Trade Competitiveness
Fee Account, established in the State Treasury, to be
available to the Authority, upon appropriation by the
Legislature, for purposes of implementing provisions of
this bill;
f) Determine the amount of each tax credit allowed under
this bill and provide the Franchise Tax Board (FTB) with an
electronic copy of each tax credit certification, within 30
days after issuing the certificate;
g) Establish audit procedures of taxpayers who have been
awarded a tax certificate to verify that the certificate
was awarded consistent with the requirements of this bill;
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h) Cancel any unapplied amount erroneously awarded and
recapture any previously allowed credit erroneously
awarded; and,
i) Notify the FTB of any amounts of a tax credit
certificate that were erroneously awarded and were
canceled.
4)Provides that the Authority may borrow money for purposes of
meeting its expenses under this act, not to exceed the amount
appropriated. A loan shall be repayable solely from the
moneys appropriated to the Authority from the Job and Trade
Competitiveness Fee Account and is not a general obligation of
the state for which the full faith and credit of the state are
pledged.
5)Specifies that a tax credit certificate awarded by the
Authority is not transferable.
6)Allows the Authority to prescribe rules, guidelines, or
procedures necessary or appropriate to carry out the purposes
of the tax credit certificate program.
7)Limits the total amount of tax credit certificates to be
awarded in each of the five calendar years to $100 million,
for a total of $500 million. Specifies that any portion of
the authorized amount not awarded in a calendar year may be
awarded in a future calendar year ending before January 1,
2018.
8)Allows, for taxable years beginning on or after January 1,
2013 and before January 1, 2018, an import-export cargo (IEC)
tax credit, a hiring tax credit, and a cargo facility tax
credit, under both the Personal Income Tax (PIT) and the
Corporation Tax (CT) Laws, to a taxpayer that has been awarded
a tax credit certificate by the Authority.
9)Provides that an amount of the IEC tax credit shall be
determined as follows:
a) In the case of an importer or exporter that imported or
exported through California ports or airports during the
preceding taxable year:
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i) $3.125 per ton of increased exports or imports
through ports in California in a tax year attributable to
the importer or exporter.
ii) $1,000 for each $10,000 of increased exports or
imports through airports in California in a tax year
attributable to the exporter or importer.
b) In the case of an importer or exporter that did not
import or export in the preceding taxable year:
i) $3.125 per ton of exports or imports through
California ports for an importer or exporter that exports
or imports at least 400,000 tons through California ports
in a taxable year.
ii) $1,000 for each $10,000 of exports and imports
through California airports in California for an exporter
or importer that exports or imports at least $250,000 of
imports or exports through California airports in a
taxable year.
10)Specifies that an amount of the hiring tax credit is equal to
$3,000 for each net increase in qualified full-time employees
hired in California during the taxable year by an exporter or
importer.
11)Specifies that an amount of the cargo facility tax credit for
each taxable year is equal to an amount of up to 2% of the
total capital costs for a cargo facility constructed in
California by an exporter or importer during the taxable year.
12)Limits the aggregate amount of the IEC tax credit, hiring tax
credit, and the cargo facility tax credit that may be allowed
to an importer or exporter in a taxable year to the lesser of
(a) $250,000, or (b) the amount specified in the tax credit
certificate issued to the taxpayer by the Authority.
13)Defines a "tax credit certificate" as a certificate awarded
by the Authority to an exporter or importer to claim the tax
credits in the amount specified in the certificate.
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14)Defines "exporter" as a California taxpayer that is a shipper
of record of agricultural or manufactured goods on an ocean
bill of lading or an air waybill.
15)Defines "export cargo tonnage" as the weight of cargo
exported through California ports by an exporter to
destinations outside the United States (U.S.).
16)Defines "export cargo value" as the value of cargo exported
through California airports by an exporter to destinations
outside of the U.S. as certified by the applicant for a tax
credit certificate.
17)Defines "importer" as a California taxpayer that is a
consignee of record of agricultural products or manufactured
goods on an ocean bill of lading or an air waybill.
18)Defines "importer cargo tonnage" as the weight of cargo
imported by an importer through California ports by that
importer from outside the U.S.
19)Defines "import cargo value" as the value of cargo imported
through California airports by an importer from outside the
U.S. as certified by the applicant for a tax credit
certificate.
20)Defines "increased exports or imports" as the difference
between the amount of exports and imports, whether measured by
tons or dollars, in a current taxable year and the preceding
taxable year.
21)Defines "qualified full-time employee" as either a qualified
employee who was paid qualified wages by the exporter or
importer for services not less than an average of 35 hours per
week or a qualified employee who was a salaried employee and
was paid compensation during the taxable year for the
full-time employment, within the meaning of Labor Code Section
515.
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22)Excludes from the definition of a "qualified full-time
employee" a qualified employee in an enterprise zone, a
manufacturing enhancement area, a targeted tax are, or a local
agency military base recovery area, as specified.
23)Defines "capital costs" as all costs and expenses incurred by
one or more exporter or importer in connection with the
acquisition, construction, installation, and equipping of a
cargo facility, including any environmental mitigation
undertaken specifically to reduce the impacts of a cargo
facility, during the period commencing with the date on which
the acquisition, construction, installation, and equipping
commences and ending on the date on which the cargo facility
is placed in service. Provides that capital costs shall not
include project costs that were expended prior to January 1,
2013.
24)Defines "cargo facility" as a capital project at a port or
airport in California designed to increase cargo-moving
capacity at the port or airport and that is expended in a
taxable year and has a useful life of five years or more.
25)Allows a credit that exceeds the tax liability in a taxable
year to be carried over to the following taxable year, and
succeeding nine years, if necessary, until the credit is
exhausted.
26)Is repealed on December 1, 2018.
27)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices and decisions.
2)Allows a depreciation deduction for the obsolescence or wear
and tear of property used in the production of income or
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property used in a trade or business. The amount of the
deduction is determined, in part, by the cost (or basis) of
the property.
3)Includes in the definition of "depreciable property"
equipment, machinery, vehicles, and buildings, but excludes
land.
4)Allows a New Jobs Tax Credit for taxable years beginning on or
after January 1, 2009, to qualified employers equal to $3,000
for each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual loss of $25 million in fiscal year (FY)
2012-13, $85 million in FY 2013-14, and $100 million in FY
2014-15.
COMMENTS :
1)Author's Statement . The author states, "Maintaining and
creating jobs in California should be the Legislature's top
priority. The expansion of the Panama Canal and port
improvements throughout the East Coast threaten California
jobs. AB 2656 will help create and grow California's economy
by ensuring that we remain competitive in a global market.
The new expansion will allow companies to bypass California
ports by more easily moving them through the Panama Canal and
over to the East Coast. AB 2656 will encourage use of
California ports by providing a tax credit to those importers
and exporters who increase the volume of imports and exports,
hire employees, and who make infrastructure improvements. AB
2656 ensures that California will continue to serve as a
dominant force in international trade."
2)Arguments in Support . Proponents of this bill state that
ports are a vital part of California's economy, allowing
department stores, supermarkets, drug stores, mass merchandise
and convenience stores the ability to properly run their
businesses. Ports also provide high paying jobs for
Californians. The proponents assert that AB 2656 is a
creative and fiscally responsible proposal "that will enhance
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California's ability to remain competitive in the face of
increased competition with the opening of the widened Panama
Canal." The proponents also argue that, in addition to
helping businesses and workers, California will receive
environmental benefits from this bill. Specifically, there
are environmental benefits linked to the creation of newer,
more efficient terminal and port facilities along with the
direct environmental improvements. This bill will help reduce
emissions at the ports while also creating jobs that will
improve California's competitiveness. Finally, the proponents
maintain that California "needs to send the message to
businesses globally that the state is attempting to address
its anti-business climate by offering financial incentives to
help mitigate the higher costs of doing business here."
3)California's Ports and International Trade. California is a
major trade gateway on the Pacific Rim and is home to three of
the world's 50 largest ports. The local economies surrounding
the ports depend on California's ability to attract and grow
its cargo volumes. California's major public ports saw trade
peak in 2006, then decline in 2007 while the economy as a
whole continued to grow. In 2007, of the world's 50 largest
container ports, only two failed to post positive growth
numbers - Los Angeles and Oakland. In 2009, the ports moved
about 2.5 million fewer containers than in the year before,
the equivalent of shutting down the country's fourth busiest
seaport - Savannah, Georgia - for the entire year.
Some of the decline in volume is attributable to the weak
economy, but one cannot ignore the growing competition around
the world. On the West Coast, Canada is aggressively
marketing its mega port in Vancouver and new port facilities
in Prince Rupert, specifically highlighting the economic and
time advantages over Southern California ports. Mexico is
also beginning to compete against American ports. The biggest
competition, however, may come from improvements to the Panama
Canal. In 2014, a $5.25 billion expansion of the Panama Canal
will be completed. The new expansion will allow larger ships
to move through the canal, allowing for a bigger share of
Asian container freight to move directly through to the
eastern U.S.
4)The Potential Impact of the Expansion of the Panama Canal on
California's Ports and Economy. According to Paul Bingham,
Economic Service Line Leader for Wilbur Smith Associates, as
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many as 100,000 jobs could be lost in California due to the
expansion of the Panama Canal. Additionally, there could be
as much as a 25% cargo diversion from Los Angeles-Long Beach
ports. This diversion amounts to about 3 million containers
which, in turn, will reduce the number of dockworkers, trucks,
and trains needed to move cargo. Recently, California State
University, Long Beach, held a series of forums to discuss the
economic impact of an expanded Panama Canal. Though it had
been mentioned that cargo volumes in California may likely
increase as the economy improves, most of the speakers
acknowledged some loss in economic activity due to the Canal's
expansion. In answering the question of who wins and who
loses, Dr. Mary Brooks, the William A. Black Chair of Commerce
at Dalhousie University in Halifax, noted that the winners
will be American ports who improve service and reliability.
However, Mr. Todd Thomas, Los Angeles Branch Manager for
Expeditors International, was not as optimistic. He explained
that, in the long run, West Coast ports would be the losers,
primarily due to the lower cost of shipping vessels through
the Canal. Many of the speakers agreed that California would
lose business if nothing is done to improve its international
competitiveness.
5)What Does This Bill Do ? AB 2656 creates a new and unique
program - the Jobs and Trade Competitiveness Act - intended to
offset the negative economic impact of the Panama Canal's
expansion on California's ports. This bill creates three
distinct tax credit programs:
a) IEC credit, designed to encourage cargo growth
originating in, or destined to, California;
b) Qualified employee hiring credit, intended to increase
the number of full-time employees employed by California
ports ; and,
c) Cargo facility tax credit, created to incentivize
private investment in California's port infrastructure.
These credits are not traditional tax expenditures. In order
to claim any of these tax credits, a taxpayer must receive a
tax credit certificate from the Authority showing the
taxpayer's eligibility and the amount of credit that was
allocated to the taxpayer by the Authority. While the same
taxpayer may be eligible for all three credits, the aggregate
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amount of credits allocated by the Authority to the taxpayer
in a taxable year may not exceed $250,000. Furthermore,
similarly to the California's Film Tax Credit Program, the
total amount of credits that may be allocated by the Authority
in a particular tax year is capped at $100 million. The
allocation of the credits will be done on a
first-come-first-served basis. The program will be effective
for five taxable years beginning on or after January 1, 2013,
and before January 1, 2018.
6)What is a "Tax Expenditure"? : Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. In the late 1960s, 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).
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 without demonstrating any
public benefit. Second, there is generally no control over
the amount of revenue losses associated with any given tax
expenditure.<1> 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.
7)Measuring the Success of a Tax Expenditure Program (TEP) .
Several studies have looked at tax credits and other forms of
tax incentives as ways of generating economic growth. While
some studies have shown that tax credits have some positive
impact, others have found that these types of incentives have
little or no impact on economic activity.
---------------------------
<1> This is not so in the case of the existing New Jobs Tax
Credit, which is capped at roughly $400 million for all taxable
years.
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Generally, advocates for tax incentives, such as Arthur Laffer
and N. Gregory Mankiw, argue that reduced taxes allow
taxpayers to invest money that would otherwise be paid in
taxes to better use, thereby, creating additional economic
activity. "Supply-siders" posit that higher taxes do not
result in more government revenue; instead, they suppress
additional innovation and investment that would have led to
more economic activity and, therefore healthier public
treasuries, under lower marginal tax rates. Industry-specific
credits complement this theory by lowering tax costs for
industries that provide positive multiplier effects, such as
stimulating economic activity among suppliers and increasing
economy-wide purchasing power resulting from hiring additional
employees.
Critics, however, state that tax incentives rarely result in
additional economic activity. Companies locate in California
because of its competitive advantages, namely its environment,
weather, transportation infrastructure, access to ports,
highways, and railroads, as well as its highly skilled
workforce and world class higher education system. These
advantages trump perceived disadvantages resulting from its
tax structure and other policies. Additionally, critics argue
that industry-specific tax incentives do not actually effect
business decisions; instead, enhanced credits and deductions
reward firms for investments they would have made anyway.
�See, e.g., D. Neumark, J. Zhang, and J. Kolko, Are Businesses
Fleeing the State? Interstate Business Location and
Employment Change in California, (a PPIC report showing that,
while California loses jobs due to firms leaving the state,
these losses have a minimal effect on the economy); D.
Neumark and J. Kolko, Are California Companies Shifting Their
Employment to Other States? (finding that, while California
companies have shifted jobs to other states, out-of-state
firms have offset these losses by hiring more in California)].
As noted by the Legislative Analyst's Office (LAO) in the
presentation at this Committee's hearing "Assessing Tax
Expenditure Programs in Light of California's Fiscal
Challenges" on February 22, 2012, "policymakers should regard
many TEP evaluations with skepticism." It was further
explained that, "Analysis of alternative uses of public funds
is difficult and often omitted entirely from such studies.
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These studies also usually rely on extensive and sometimes
subjective assumptions, which, if changed, can produce very
different results? It is rare that the value of TEPs can be
demonstrated conclusively compared to these alternate uses of
tax dollars. If the Legislature wishes to use TEPs, despite
these challenges, it is important that TEPs be used
cautiously, structured carefully, and reviewed regularly to
consider if they operate in an effective and cost-efficient
manner."
8)Measuring the Success of the Proposed Tax Credits . According
to the author and proponents, AB 2656 is intended to ensure
the continued success and growth of California's ports. The
main goal of this legislation is to slow down the shift of
economic activity from California to other parts in the world,
to prevent large ships and cargo from bypassing California
ports, and to make California competitive in light of the
Panama Canal's expansion.
Currently, larger ships that are unable to pass through the
Panama Canal must dock in a California port to offload cargo
destined for the East Coast. The cargo is then shipped to its
destination either by truck or rail. Although it is difficult
to predict how much economic activity will be lost due to the
Panama Canal's expansion, most experts expect some loss in
cargo volume. Unlike many other tax credits and incentives
that attempt to generate economic growth, AB 2656 is trying to
mitigate potential future losses.
If the main goal of AB 2656 is to prevent economic activity from
moving to other states, tax credits may arguably serve as a
useful tool in retaining the already existing economic
activity in California. However, with the current financial
state of the California economy, all state programs affecting
the General Fund are under scrutiny to ensure that the
programs are effectively achieving desired results. Even if
the proposed tax credits may achieve the stated purpose, the
Committee may wish to consider whether other alternatives -
such as for example, a direct grant to California ports and
airports - would be a more efficient and effective way to deal
with the problem.
9)Do Hiring Credits Actually Produce Jobs? : AB 2656 also
proposes a hiring credit in an amount of $3,000 for each net
increase in qualified full-time employees hired in California
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by an exporter or importer in a taxable year. The proposed
credit is similar to the New Jobs Tax Credit enacted by the
Legislature in 2009. The New Jobs Tax Credit is allowed for
taxable years beginning on or after January 1, 2009, to
qualified employers in an amount equal to $3,000 for each net
increase in qualified full-time employees hired during the
taxable year. Unlike the proposed hiring credit, however, the
existing credit is limited to small businesses (i.e.,
taxpayers with 20 or fewer employees as of the last day of the
preceding taxable year). It is also capped at roughly $400
million for all taxable years.
With the national unemployment rate hovering above 8%, some have
advocated job creation tax credits as a means of revitalizing
the struggling economy. The question, however, is whether
such credits actually work. Recently, Daniel Wilson,
assistant director of the Center for the Study of Innovation
and Productivity at the Federal Reserve Bank of San Francisco,
attempted to answer this question. In a paper co-authored
with Robert Chirinko of the University of Illinois at Chicago,
Wilson examined the period between January 1990 and August
2009, and found that, among states where employers could
qualify for credits immediately after enactment of the credit
legislation, there was a slight employment increase of 0.12%.
These findings would suggest that hiring credits, at least at
the state level, are a blunt tool for stimulating job growth.
Furthermore, at this Committee's recent oversight hearing on
tax expenditure programs, Professor Suzanne O'Keefe of
Sacramento State University addressed the question of whether
the New Jobs Tax Credit actually encourages job creation.
Professor O'Keefe began by noting that the program provides
small businesses with a $3,000 credit for each net increase in
full-time employees. However, she was quick to point out that
any new full-time hire costs his/her employer a minimum of
$21,000 per year, assuming an $8 minimum wage and other
legally required benefits. Thus, a $3,000 credit represents,
at most, only 14% of the cost of hiring a new full-time
employee. Professor O'Keefe testified that the New Jobs Tax
Credit only serves to tip the scales in favor of hiring for
relatively few small businesses. It would seem that, in the
majority of cases, the New Jobs Tax Credit serves to reward
small businesses for hiring decisions they would have made
even without the credit. The FTB reports that, as of April 7,
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2012, 16,539 personal income tax and business entity returns
had been filed claiming the New Jobs Tax Credit, with the
cumulative credit amount totaling only $98 million. At this
rate, it could take several years for the existing $400
million cap to be reached absent significant growth in the
economy.
The Committee may wish to consider whether the hiring tax
credit proposed by this bill will be instrumental in reducing
the unemployment rate in California or increasing the
international cargo volumes in California's ports.
10)Multiple Claims. It appears that, under this bill, taxpayers
would be able to claim the cargo facility tax credit for the
capital costs that are generally required to be capitalized
and are added to the basis of the property to be deducted
later. The author may wish to clarify that taxpayers will not
be eligible to receive several tax incentives for the same
expenses.
11)FTB Implementation Concerns:
a) Timing of the Tax Credit. It is unclear as to whether,
and to what extent, tax credit certificates could be
awarded prior to the filing deadline for a taxable year
because completion of the activity required to obtain a tax
credit certificate may occur as late as the last date of
the taxable year for which the certificate is issued and
awards of tax credit certificates may be delayed until the
end of a calendar year in certain circumstances.
b) Unintended Consequences. An exporter or importer that
met the cargo tonnage and dollar value threshold amounts
could avoid the incremental nature of the credit by
alternating the flow of their cargo from California's
airports to ports every other taxable year.
12)Related Legislation.
SB 830 (Wright and Bradford), introduced in the 2011 Legislative
Session, would have created a trade infrastructure tax credit
for taxpayers that invest in, and use, public port facilities
in California. SB 830 failed to pass out of the Senate
Committee on Governance and Finance.
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AB 2687 (Bradford), introduced in the 2009-10 Legislative
Session, would have created a trade infrastructure investment
tax credit and an import-export cargo tax credit for taxpayers
that invest in, and use, public port facilities in California.
AB 2687 failed to pass out of the Assembly Appropriations
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Port Authorities
California Contract Cities Association
CalTax
Pacific Merchant Shipping Association
FuturePorts
Chamber of Commerce, Los Angeles Area
California Taxpayers Association
Regional Economic Association Leaders of California
Engineering Contractors' Association
California Fence Contractors' Association
Marin Builders' Association
Flasher/Barricade Association
California Chapter of the American Fence Association
California Contract Cities Association
Harbor Association of Industry and Commerce
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098