BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 686 HEARING: 5/11/11
AUTHOR: Padilla FISCAL: Yes
VERSION: 2/18/11 TAX LEVY: Yes
CONSULTANT: Miller
BIOTECHNOLOGY SALES & USE TAX EXEMPTION
Provides a sales and use tax exemption for purchases of
property for biotechnology manufacturing and research and
development activities
Background and Existing Law
For ten years, the 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. Manufacturers were defined
in terms of specific federal "Standard Industrial
Classification" (SIC) codes. The exemption provided a
state tax portion for sales and purchases of qualifying
property, and the income tax credit was equal to 6% of the
amount paid for qualified property placed in service in
California. The MIC credit included 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 meeting state or
federal standards. Qualified property also included
tangible personal property purchased by a contractor, as
specified, for use in the performance of a construction
contract for the qualified person who would use that
property as an integral part of the manufacturing process,
as described. 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
conditionally sunset in any year following a year when
manufacturing employment (as determined by the Employment
Development Department) did not exceed January 1, 1994
SB 686 -- 2/18/11 -- Page 2
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.
SB 71 (Padilla, 2010) authorized a sales and use tax
exemption under the Energy and Advanced Transportation
Financing Authority (CAEATFA) to approve a sales and use
tax exemption on tangible personal property utilized for
the design, manufacture, production, or assembly of
advanced technologies or alternative energy source
products, components or systems.
Under current law, business entities engaged in
manufacturing and research and development activities that
make purchases of equipment and supplies for use in the
conduct of their manufacturing and related activities are
required to pay tax on their purchases to the same extent
as any other person either engaged in business in
California or not so engaged. Current law does not provide
special tax treatment for purchases of equipment used by
these entities in their biotechnology manufacturing and
research and development activities.
Beginning July 1, 2011, the statewide sales and use tax
rate (7.25%) imposed on taxable sales and purchases of
tangible personal property are made up of the following
components:
------------------------------------------------------------
| | | |
|Rate | Jurisdiction | Purpose/Authority |
| | | |
|-----+-------------------+----------------------------------|
| | | |
|5.00%|State (General |State general purposes |
| |Fund) | |
| | | |
|-----+-------------------+----------------------------------|
| | | |
|0.25%|State (Fiscal |Repayment of the Economic |
SB 686 -- 2/18/11 -- Page 3
| |Recovery Fund) |Recovery Bonds |
| | | |
|-----+-------------------+----------------------------------|
| | | |
|0.50%|State (Local |Local governments to fund health |
| |Revenue Fund) |and welfare programs |
| | | |
|-----+-------------------+----------------------------------|
| | | |
|0.50%|State (Local |Local governments to fund public |
| |Public Safety |safety services |
| |Fund) | |
| | | |
|-----+-------------------+----------------------------------|
| | | |
|1.00%|Local |City and county general |
| |(City/County) | |
| | | |
| | |Dedicated to county |
| |0.75% City and |transportation purposes |
| |County | |
| | | |
| |0.25% County | |
|-----+-------------------+----------------------------------|
| | | |
|7.25%|Total Statewide | |
| |Rate | |
| | | |
------------------------------------------------------------
Proposed Law
Senate Bill 686 provides a full sales and use tax exemption
(7.25%, plus any applicable district taxes) for the
following purchases made by a "qualified person" for use in
"biotechnology manufacturing":
Qualified tangible personal property to be used 50
percent or more in any stage of manufacturing of property
(i.e., machinery, equipment, component parts, belts,
shafts, computers, software, and pollution control
equipment), as specified.
The bill defines a "qualified person" as any person engaged
in "biotechnology manufacturing." The bill defines
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"biotechnology manufacturing" to mean manufacturing
activities as described in the North American Industrial
Classification System (NAICS). These industries include:
medicinal and botanical, pharmaceutical preparation,
in-vitro diagnostic substance or biological product
manufacturing. Biotechnology manufacturing would also
include research and development in biotechnology, research
and development in the social sciences and humanities, and
marketing research and public opinion polling.
.
SB 686 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 consumed or 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.
As a tax levy, the bill would become effective immediately,
but would become operative on January 1, 2012.
State Revenue Impact
The BOE estimates the following revenue losses associated
with this bill:
2010-11 (1/2 year): $74 million
2011-12: $154 million
2012-13: $164 million
Comments
1. Purpose of the bill . The purpose of SB 686 to provide
a sales tax exemption for manufacturing equipment used to
produce of biotechnology in order to attract and retain the
biotechnology industry According to the author's office,
"Biotechnology is the application of genetic and cellular
research to develop and manufacture pharmaceutical and
therapeutic products; and diagnostic and medical devices.
SB 686 -- 2/18/11 -- Page 5
A major hurdle for biotechnology manufacturers is the cost
of the necessary equipment needed to create their products.
California, Rhode Island and Arkansas are the only states
that tax the sale of manufacturing equipment. This is a
strong disincentive for manufacturers searching for the
right place to invest, build, and hire."
2. What about me? Senate Bill 686 proposes a sales tax
exemption for the biotechnology industry. The bill does
not consider other jobs that this state has lost. This
committee hears from various industries that have suffered
in this economy and promise to increase jobs with various
tax incentives. For example, the aerospace industry has
asked for a sales and use tax exemption on fuel in order to
stay in this state; the manufacturers have asked or a broad
manufacturing exemption in order to stay in this state and
create jobs; the motorcycle dealers have asked for an
exemption on the trade in value of motorcycles in order to
increase jobs in this state. Furthermore, this bill does
not address the specific demographics of unemployment:
males between the ages of 18-28 that have been out of work
longer than any other demographic. The committee may wish
to consider whether this is the best way to increase jobs
and employment in this state or if it would make more sense
to focus on a broader industry or a specific demographic to
create more jobs overall.
3. The Matrix. While not used for decoding secret
messages, SB 686 uses a series of North American Industrial
Classification Codes to determine which industries qualify
for a sales and use tax exemption under this bill. While
the intent is to include biotechnology, the codes
referenced in the include establishments primarily engaged
in specified manufacturing and research and development and
marketing research activities. According to the author's
office, the industry groups are trying to agree on which
codes are in and out. The Committee may wish to consider
limiting this bill to only specific codes apply to the
biotechnology industry.
SB 686 -- 2/18/11 -- Page 6
4. Three economists enter a bar. There are many jokes
that economists do not agree on very much and that all
conclusions on based on assumptions which are often faulty.
There are few economists, however, that do not agree that
the best policy for the state to pursue is to broaden the
tax bases and lower the tax rates. They further argue that
a sales tax exemption on manufacturing overall makes sense
so as not to tax the business inputs and only the final
sale. If these two ideas are the benchmarks of sound tax
policy, the committee may wish to consider a broader tax
discussion that does limit sales and use tax exemptions and
rather considers the entire tax structure of the state.
5. With this bill, I make you a promise. The intent of SB
686 is to provide a sales and use tax exemption for the
biotechnology industry with the promise of creating jobs in
the state. The bill does not explicitly set forth any job
requirements from the sales and use tax exemption. Like
the Manufacturer's Investment Credit of 1993-2003, the
Committee may wish to consider an aggregate jobs
requirement in order for this bill to prove that it has met
its stated objective.
6. Riding into the sunset. SB 686 does not have a sunset
date. It is generally the policy of this Committee to
include at least a seven year sunset on all tax credits,
exemptions and deductions. The Committee may wish to
consider including a seven-year sunset date on this bill.
7. Local share. SB 686 exempts the state and local share
of the sales tax. Generally, bills that exempt tangible
personal property from the sales tax, it only exempts the
state portion. The Committee may wish to consider amending
this bill to exclude only the state portion of the sales
tax and keeping the local portion whole.
8. Making it work. The BOE lists the following concerns
with the definitions in the bill:
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The term "property," needs clarifying. As
currently drafted, the bill would exempt sales of
tangible personal property purchased by a qualified
person for use in the manufacturing of "property."
Traditionally, when the Legislature addresses the
manufacturing of property, it means the traditional
manufacturing of tangible personal property, not the
creation of intangibles or the provision of services
and utilities. To the extent that the bill does not
expressly limit such term to the manufacturing of
tangible personal property, then it may be asserted
that it has left open the door to unintended arguments
that it includes the creation of intangible property
or the provision of services and utilities.
Without this clarification, the bill would not only
complicate administration of the statute, but also
would potentially open the door for aggressive
litigation from the providers of services, utilities,
and intangibles, possibly resulting in significant
revenue losses to the state far beyond what the
Legislature intended. While arguments for such greater
scope seem unreasonable and overbroad, clarification
now would help preclude unanticipated future issues
and problems.
This bill defines a "qualified person" as a person
engaged in biotechnology manufacturing, which this
bill defines as manufacturing in the lines of business
described in specifically identified NAICS codes. The
specified NAICS codes under the definition of a
"qualified person."
A qualified person would be an entity primarily
engaged in specified manufacturing activities, as well
as specified research and development and marketing
research activities. The bill defines the terms
"manufacturing," "primarily," and "process." However,
the bill does not define the terms research and
development and marketing research. In order to
administer the proposed exemption effectively, these
terms need to be defined.
In defining "qualified person," it is recommended
that the bill require that the qualifying person be
SB 686 -- 2/18/11 -- Page 8
primarily engaged in the activities described in the
referenced codes. This is an important issue and one
that generated many disputes when the BOE administered
the sales and use tax manufacturing equipment
exemption previously.
The proposed definitions for the types of property
included and excluded from the proposed exemption
should be further refined. For example, on page 3,
lines 27 and 37, the bill refers to the items having a
useful life of one year or more (or less than one
year). In order to lessen potential audit disputes,
the bill should contain some mechanism for determining
the useful life.
9. Don't I know you? Since the MIC sunset in 2003, there
have been over 20 bills introduced either to reinstate,
expand or modify the exemption but all failed to pass. In
addition, similar bills have been introduced this year:
SB 47 (Alquist) would provide a partial (General
Fund and Fiscal Recovery Fund) sales and use tax
exemption for purchases of qualifying tangible
personal property used by entities engaged in
manufacturing, research and development, newspaper
printing, and software production, and for
semiconductor, biotechnology and pharmaceutical clean
rooms and equipment. SB 47 is a two-year bill.
SB 395 (Dutton) would provide a partial (General
Fund only) sales and use tax exemption, beginning
January 1, 2012 and before January 1, 2019, on
tangible personal property purchased for use in
manufacturing activities by manufacturers and software
publishers and affiliates. The Committee on
Governance & Finance approved this bill.
AB 204 (Halderman) would provide a partial (General
Fund and Fiscal Recovery Fund) sales and use tax
exemption for purchases of equipment by a biomass
energy facility, as defined, for use in its biomass
energy production activities.
AB 218 (Wieckowski), among its provisions, would
provide a partial (General Fund only) sales and use
tax exemption for purchases of certain tangible
SB 686 -- 2/18/11 -- Page 9
personal property by qualified persons engaged in
manufacturing and software production, as specified
and defined. This bill would intend to use revenue
generated from the estate tax, which this bill would
create, to supplant the reduction of General Fund
revenue as a result of the exemption. Its enactment,
however, would require voter approval at the next
statewide General Election.
AB 303 (Knight) would reinstate the partial
(General Fund only) sales and use tax exemption for
purchases of qualifying tangible personal property by
new trades or businesses engaged in manufacturing.
AB 1057 (Olsen) would provide a partial (General
Fund only) sales and use tax exemption, beginning
January 1, 2014 and before January 1, 2020, on
tangible personal property purchased for use in
manufacturing activities, research and development,
and air pollution mitigation by manufacturers and
affiliates.
Support and Opposition (5/5/11)
Support : BayBio; BIOCOM; Granada Hills Chamber of
Commerce.
Opposition : California Taxpayer Reform Association;
California State Association of Counties.