BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 395 (Dutton)
Hearing Date: 05/26/2011 Amended: 03/29/2011
Consultant: Mark McKenzie Policy Vote: G&F 6-3
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BILL SUMMARY: SB 395 would provide a partial sales and use tax
exemption (the General Fund portion only) from January 2, 2012
until January 1, 2019 for the following purchases by a taxpayer
involved in manufacturing and software development:
Tangible personal property to be used primarily (50 percent or
more) in manufacturing, processing, refining, fabricating, or
recycling, as specified.
Tangible personal property to be used primarily in research
and development.
Tangible personal property to be used primarily to maintain,
repair, measure, or test any qualified equipment.
Tangible personal property purchased for use by a contractor
in the performance of a construction project that is integral
to the manufacturing, processing, refining, fabricating, or
recycling process of the qualifying taxpayer, as specified.
The exemption would not apply to: purchases used primarily in
administration, general management, or marketing; consumables
with a useful life of less than one year; furniture, inventory,
and equipment used in the extraction process, or equipment used
to store manufactured products; or for qualified property that
is subsequently removed from the state within one year of
purchase, as specified.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
BOE administration potentially significant administrative
costs General
-----------see staff
comments------------
Sales/Use tax revenue loss $600,000
$1,360,000$1,450,000 General
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STAFF COMMENTS: SUSPENSE FILE.
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. The
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sales and use tax exemption provided relief of payment of the
state tax portion for 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. The
previous sales and use tax exemption applied to purchases of the
same types of property that are described in this bill. New
manufacturers could either receive the benefit of the exemption,
or claim the income tax credit. However, existing manufacturers
could only receive the benefit of the income tax credit. This
sales and use tax exemption and income tax credit had a
conditional sunset date that was triggered when manufacturing
employment (as determined by the
Employment Development Department) did not exceed manufacturing
employment as of January 1, 1994 by more than 100,000 workers.
On January 1, 2003, manufacturing employment was less than the
1994 number by over 10,000 workers, and therefore the MIC and
partial sales tax exemption expired at the end of 2003.
SB 395 would provide a new partial sales and use tax exemption
for qualified purchases by a taxpayer involved in manufacturing
and software development until January 1, 2019. This exemption
is substantially similar to the exemption in state law from 1994
until 2003, and is intended to decrease the cost of doing
business for manufacturing and software development companies in
an attempt to stimulate investment and employment in those
industries and to attract and expand business activity in
California.
The Board of Equalization (BOE) estimates that this exemption
would apply to the following purchases by the manufacturing and
software industries: $12.8 billion in 2011-12 (half year), $27.2
billion in 2012-13, and $28.9 billion in 2013-14. Revenue
losses attributable to the exemption of these purchases from the
state portion of the sales and use tax (5 percent) would be
approximately $600 million in 2011-12, $1.36 billion in 2012-13,
and $1.45 billion in 2013-14.
This bill would provide a partial sales and use tax exemption,
thereby creating a new exemption category since there are no
partial exemptions that apply only to the 5 percent General Fund
portion of the sales tax. The BOE would incur administrative
costs attributable to programming, return revisions, and return
processing associated with the new partial exemption. In
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addition, BOE would incur costs to notify affected retailers,
prepare a special publication and exemption certificate, audit
claimed exemptions, and answer inquires from the public and
taxpayers. BOE administrative costs are unknown at this time,
but could be significant.