BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 395 HEARING: 3/23/11
AUTHOR: Dutton & Strickland FISCAL: Yes
VERSION: 2/16/11 TAX LEVY: Yes
CONSULTANT: Miller
SALES AND USE TAX EXEMPTION FOR MANUFACTURING
Provides a sales and use tax exemption for manufacturing
and research and development
Background and Existing Law
Existing law provides no special tax treatment to entities
engaged in manufacturing or software production for
purchases of equipment and other supplies. Business
entities engaged in manufacturing, research and
development, and software producing activities that make
purchases of equipment and supplies for use in the conduct
of their manufacturing and related activities are required
to pay sales and use tax on their purchases to the same
extent as any other person either engaged in business in
California.
The state sales and use tax rate is 8.25% as detailed
below. Cities and Counties may increase the sales and use
tax rate up to 2% for either specific or general purposes
with a vote of the people.
---------------------------------------
|4.75%| State |Goes to State's General |
| | | Fund |
| | | (Total General Fund is |
| | | 6%) |
|-----+--------+------------------------|
|0.25%| State |Goes to State's General |
| | | Fund |
| | | (Total General Fund is |
| | | 6%) |
|-----+--------+------------------------|
|1.00%| State |Goes to State's General |
| | | Fund |
SB 395 -- 2/16/11 -- Page 2
| | | (Total General Fund is |
| | | 6%) |
|-----+--------+------------------------|
|0.25%| State | Goes Towards State's |
| | | Fiscal Recovery Fund, |
| | | to pay off Economic |
| | | Recovery Bonds (2004) |
|-----+--------+------------------------|
|0.50%| State | Goes to Local Public |
| | | Safety Fund to support |
| | | local criminal justice |
| | | activities (1993) |
|-----+--------+------------------------|
|0.50%| State | Goes to Local Revenue |
| | | Fund to support local |
| | | health and social |
| | |services programs (1991 |
| | | Realignment) |
|-----+--------+------------------------|
|1.00%| Local | 0.25% Goes to county |
| | | transportation funds |
| | | 0.75% Goes to city and |
| | | county operations |
|-----+--------+------------------------|
|Total| | |
| : | | |
|-----+--------+------------------------|
|8.25%|State/Lo| Total Statewide Base |
| | cal |Tax Rate |
---------------------------------------
For a ten-year period ending December 31, 2003, California
law provided a partial (General Fund only) sales and use
tax exemption for purchases of equipment and machinery by
new manufacturers, and income and corporation tax credits
for existing manufacturers' investments (MIC) in equipment
(SB 671, Alquist, 1993). The bill provided an exemption to
the state tax portion for sales and purchases of qualifying
property, and the income tax credit was equal to six
percent of the amount paid for qualified property placed in
service in California. Qualified property was depreciable
equipment used primarily for manufacturing, refining,
processing, fabricating or recycling; for research and
development; for maintenance, repair, measurement or
testing of qualified property; and for pollution control
SB 395 -- 2/16/11 -- Page 3
meeting state or federal standards.
The MIC had a conditional sunset date which required that
the provisions sunset in any year following a year when
manufacturing employment (as determined by the Employment
Development Department) did not manufacturing employment by
more than 100,000. On January 1, 2003, manufacturing
employment, less aerospace, did not exceed the 1994
employment number by more than 100,000 (it was less than
the 1994 number by over 10,000), and therefore the MIC and
partial sales tax exemption sunset at the end of 2003.
Proposed Law
SB 395 provides a partial exemption (General Fund only)
from the sales and use tax rate of 6% (5% on and after July
1, 2011) for the following purchases made by a "qualified
person":
Tangible personal property to be used 50 percent or more
in any stage of manufacturing, processing, refining,
fabricating, or recycling of property (i.e., machinery,
equipment belts, shafts, computers, software, pollution
control equipment, buildings and foundations), as
specified.
Tangible personal property to be used 50 percent or more
in research and development.
Tangible personal property to be used 50 percent or more
in maintaining, repairing, measuring, or testing any
qualifying equipment.
Tangible personal property purchased for use by a
contractor, as specified, for use in the performance of a
construction contract for the qualified persons who will
use the property as an integral part of any
manufacturing, processing, refining, fabricating, or
recycling process or as a research or storage facility in
connection with the manufacturing process.
The bill defines a "qualified person" to be a taxpayer
involved in either research and development or
manufacturing.
SB 395 -- 2/16/11 -- Page 4
Specifies that the proposed exemption would not include
(1) any tangible personal property that is used primarily
in administration, general management, or marketing, (2)
consumables with a normal useful life of less than one
year, except for fuels used in the manufacturing process,
and (3) furniture, inventory, equipment used in the
extraction process, or equipment used to store finished
products that have completed the manufacturing process.
State Revenue Impact
The Board of Equalization did not have a revenue estimate
available but a similar bill, SB 6x 8 (Dutton, 2010) would
have resulted in revenue losses between $600 million and $1
billion.
Comments
1. Purpose of the bill . According to the author:
"California is only 1 of 3 states in the US that taxes
manufacturing equipment purchases with no credit or
exemption. Most states recognize that taxing the input as
well as the final manufactured product is double taxation
and discourages investment.
Current policy will mean even less production in California
-- out-of-state companies will elect to grow elsewhere and
in-state companies will shift workers or facilities to
other regions that do not burden capital investments with
excess taxation. Since 2000, California has lost over
600,000 manufacturing jobs. These jobs represent quality
middle class careers that have an average wage of sixty
thousand dollars, provide for upward mobility and typically
include health benefits. Manufacturers have the highest
multiplier of any industry with networks of suppliers whose
economic vitality have a direct and positive impact on the
state's revenue.
Forbes Magazine ranks California as the most costly state
to do business, while the Chief Executive Magazine finds
California's business climate as the worst in the nation
for the 4th year in a row. With California's unemployment
rate at 12.4%, 5th worst in the nation, it is vital that
the Legislature enact meaningful reforms to help
SB 395 -- 2/16/11 -- Page 5
California's economy grow."
2. The good, the bad and the pricey: Investments credits
offer some benefits to the state:
Investment Incentive-Sales and use tax exemptions
reduce the price of new capital, and leads to greater
investment.
Relocation Incentive-California would be a more
attractive place relative to other states for business
if it had a sales and use tax exemption.
Efficient Job Allocator-Competition for business
among states is an efficient job allocator. For
example, jobs are worth more in areas with higher
unemployment and such areas are likely to have
relatively aggressive tax credit programs. These
areas should be able to attract businesses away from
regions that do not value the jobs as highly.
Investment credits and sales and use tax exemptions are
also expensive and don't always make a difference:
Productivity or Jobs-If the goal of this bill is to
increase productivity in the state, it may actually
reduce employment since the goal of increased
production is to do more with fewer people.
Inequitable Taxation-This sales and use tax
exemption gives a tax advantage to manufacturing over
other business activities, as well as providing an
advantage to capital investment over labor.
Relocation not Creation-This credit results in few
new jobs, but instead pits states against each other
in competing for jobs.
Inefficient Development Policy-Tax incentives have
a negligible impact on economic growth, and any job
creation that does occur does so at a substantial cost
per job.
Ineffective Development Policy-Taxes are a very
SB 395 -- 2/16/11 -- Page 6
small percentage of overall business costs and thus
have little effect on business decisions. Labor,
transportation, land, and other factors typically
constitute much more significant proportions of total
costs than do taxes. Therefore, according to those
who hold this view, tinkering with this particular
cost is unlikely to result in a large shift or
expansion of business compared to the adverse fiscal
effects that such measures can have on the state.
3. California is at the top and the bottom. At 8.25%,
California has the highest minimum state sales tax in the
United States, which can total up to 10.75% with local
sales tax included. Proponents of a higher tax rate argue
that this rate compensates for the much reduced property
taxes brought on by Proposition 13. 31 states fully exempt
manufacturing from the sales tax.
---------------------------
| State |Gener| +max |
| | al | local |
| | Tax |Surtax |
|-------------+-----+-------|
| Alabama | 4% | 10% |
|-------------+-----+-------|
| Alaska |0.0% | 7% |
|-------------+-----+-------|
| Arizona |6.6% | 10.6% |
|-------------+-----+-------|
| Arkansas | 6% | 6% |
|-------------+-----+-------|
| California |8.25%|10.75% |
| | | |
|-------------+-----+-------|
| Colorado |2.9% | 8.0% |
|-------------+-----+-------|
| Connecticut | 6% | 6% |
|-------------+-----+-------|
| Delaware |0.0% | 0.0% |
|-------------+-----+-------|
| District of |6.0% | 6.0% |
SB 395 -- 2/16/11 -- Page 7
| Columbia | | |
|-------------+-----+-------|
| Florida | 6% | 7.5% |
|-------------+-----+-------|
| Georgia | 4% | 8% |
|-------------+-----+-------|
| Hawaii | 4% |4.712% |
|-------------+-----+-------|
| Idaho | 6% | 6% |
|-------------+-----+-------|
| Illinois |6.25%| 11.5% |
| | | |
|-------------+-----+-------|
| Indiana | 7% | 9% |
|-------------+-----+-------|
| Iowa | 6% | 7% |
|-------------+-----+-------|
| Kansas |5.3% | 8.65% |
|-------------+-----+-------|
| Kentucky | 6% | 6% |
|-------------+-----+-------|
| Louisiana | 4% | 9% |
|-------------+-----+-------|
| Maine | 5% | 5% |
|-------------+-----+-------|
| Maryland | 6% | 6% |
|-------------+-----+-------|
|Massachusetts|6.25%| 6.25% |
| | | |
|-------------+-----+-------|
| Michigan | 6% | 6% |
|-------------+-----+-------|
| Minnesota |6.875|7.775% |
| | % | |
|-------------+-----+-------|
| Mississippi | 7% | 9% |
|-------------+-----+-------|
| Missouri |4.225|9.241% |
| | % | |
|-------------+-----+-------|
| Montana |0.0% | 3% |
|-------------+-----+-------|
| Nebraska |5.5% | 7% |
|-------------+-----+-------|
| Nevada |6.85%| 8.1% |
| | | |
SB 395 -- 2/16/11 -- Page 8
|-------------+-----+-------|
| New |0.0% | 0.0% |
| Hampshire | | |
|-------------+-----+-------|
| New Jersey | 7% | 7% |
|-------------+-----+-------|
| New Mexico |5.125|8.5625%|
| | % | |
|-------------+-----+-------|
| New York | 4% |8.875% |
|-------------+-----+-------|
| North |5.75%| 8.25% |
| Carolina | | |
|-------------+-----+-------|
|North Dakota | 5% | 5% |
|-------------+-----+-------|
| Ohio |5.5% | 7.75% |
|-------------+-----+-------|
| Oklahoma |4.5% | 8.5% |
|-------------+-----+-------|
| Oregon |0.0% | 0.0% |
|-------------+-----+-------|
|Pennsylvania | 6% | 8% |
|-------------+-----+-------|
| Puerto Rico |5.5% | 7% |
|-------------+-----+-------|
|Rhode Island | 7% | 7% |
|-------------+-----+-------|
| South | 6% | 9% |
| Carolina | | |
|-------------+-----+-------|
|South Dakota | 4% | 6% |
|-------------+-----+-------|
| Tennessee | 7% | 9.75% |
|-------------+-----+-------|
| Texas |6.25%| 8.25% |
| | | |
|-------------+-----+-------|
| Utah |4.75%| 8.35% |
| | | |
|-------------+-----+-------|
| Vermont | 6% | 7% |
|-------------+-----+-------|
| Virginia | 4% | 5% |
|-------------+-----+-------|
| Washington |6.5% | 9.5% |
SB 395 -- 2/16/11 -- Page 9
|-------------+-----+-------|
| West | 6% | 6% |
| Virginia | | |
|-------------+-----+-------|
| Wisconsin | 5% | 5.6% |
|-------------+-----+-------|
| Wyoming | 4% |7% |
| | | |
---------------------------
3. Show me the money: Tax credits provide a
dollar-for-dollar reduction in tax, which is based on a
firm's net income, so only firms that generate profits may
make use of tax credits. Sales tax exemptions are arguably
superior to tax credits because it benefits all companies
that purchase qualified equipment, regardless of whether
the firm is profitable.
Support and Opposition (3/16/11)
Support : CalTax, California Manufacturers and Technology
Association
Opposition : California Tax Reform Association