BILL ANALYSIS �
AB 777
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 777 (Muratsuchi)
As Amended February 19, 2014
2/3 vote. Tax levy
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|ASSEMBLY: |69-5 |(January 29, |SENATE: |32-2 |(April 10, |
| | |2014) | | |2014) |
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Original Committee Reference: REV. & TAX.
SUMMARY : Exempts from property tax qualified property, as
defined, for use in space flight.
The Senate amendments :
1)Modify the definition of "qualified property" to exclude
tangible personal property (TPP) that is placed or used aboard
any facility, system, vehicle, satellite, or station
regardless of whether the property is to be ultimately
returned to this state.
2)Change the exemption operative dates to January 1, 2014, lien
date, through the January 1, 2024, lien date.
3)Change the repeal date of this section to July 1, 2025.
4)Add a provision providing that no inference shall be drawn
from this section with respect to whether space flight
property qualifies as "business inventories."
EXISTING LAW :
1)Specifies that all personal property is taxable unless the law
provides for a specific exemption.
2)Imposes a property tax on TPP items used in a trade,
profession, or business.
3)Provides a property tax exemption for business inventories,
while supplies are taxable.
FISCAL EFFECT : According to the Senate Appropriations
Committee, currently one county assessor is assessing tax on
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space flight materials, and subsequent appeals and related
activity are pending. Consequently, under current law and
regulations, this bill is estimated to result in a reduction of
local property tax revenue of roughly $1 million annually.
Under Proposition 98, this reduction in local property tax
revenues would lead to an increase in state General Fund support
for K-14 education of approximately 40% to 50%, or potentially
$500,000 annually. The exact amount would depend on the
specific factors which determine the annual Proposition 98
minimum funding guarantee.
AS PASSED BY THE ASSEMBLY , this bill:
1)Provided a property tax exemption for qualified property for
use, or for intended use, in space flight.
2)Defined "qualified property" to mean any of the following:
a) TPP that has space flight capacity. This includes an
orbital space facility, space propulsion system, space
vehicle, launch vehicle, satellite, or space station of any
kind, and any component thereof;
b) TPP to be placed or used aboard any facility, system,
vehicle, satellite, or station described above regardless
of whether that property is to be ultimately returned to
this state; or,
c) Fuel produced, sold, and used exclusively for space
flight and not adaptable for use in ordinary vehicles.
3)Defined "space flight" to mean any flight designed for
suborbital, orbital, or interplanetary travel by a space
vehicle, satellite, space facility, or space station of any
kind.
4)Provided that the exemption shall not be denied if the space
launch fails, is postponed, or is cancelled, or for the
destruction of any launch vehicle, or any component thereof.
5)Required that a taxpayer provide, upon request of the
assessor, evidence that the qualified property is being used
as specified.
6)Limited the property tax exemption to taxpayers that have a
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primary business purpose in space flight activities.
7)Provided that the exemption shall be operative from the
January 1, 2013, lien date to, and include, the January 1,
2023, lien date.
8)Provided that notwithstanding existing law, the state shall
not reimburse any local agency for lost property tax revenue.
9)Repealed this section on July 1, 2024.
10)Took immediate effect as a tax levy.
COMMENTS : The author has provided the following statement in
support of this bill:
Space exploration, until very recently, was an
entirely government run industry. However, California
has seen the emergence of private space companies that
put our state at the forefront of innovation and
technology. Grabbing international headlines,
companies like Space X are not only creating the most
advanced space vehicles, but are also significantly
contributing to the state's economy and our local
communities. This year Space X has created over 2,700
high-paying jobs and new manufacturing jobs that do
not require a four-year degree; spent $150 million
contracting with over 1,000 California suppliers; and
continues to support and train local students in
science, technology, engineering and mathematics
(STEM) disciplines.
Despite the ground-breaking advances made by the
aerospace industry, California has yet to adapt
sensible tax policies that reflect the realities of
this emerging business sector. AB 777 would exempt
propulsion systems from property taxes, ensuring that
California tailors a sensible taxation policy that
accounts for the needs of the aerospace manufacturing
industry. This bill will ensure that California's
brilliant space technology innovators stay in business
by nurturing a rational tax policy for the state's
aerospace sector.
Proponents of this bill note the following:
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At one time, California was the leader in the
aerospace industry, but the State's position slowly
eroded as multiple aerospace manufacturers moved their
operations elsewhere. Bucking this trend, SpaceX has
not only maintained its headquarters and manufacturing
operations in California, but it has grown
exponentially. As a direct result, California has
re-emerged as the U.S. leader in commercial space
launch.
SpaceX has booked nearly 50 launches on its manifest,
representing more than $4 billion in contracts. These
are missions that would have otherwise been won by the
French, Russians, and Chinese, and constituted a
substantial economic loss for California and the U.S.
economy. As SpaceX continues to win orders for launch
services, the company is investing significantly in
new technologies that push the boundaries of space
flight.
Opponents of this bill note the following:
The property tax is the only significant source of
general purpose revenue for counties. Over the past
thirty years, county general revenues have steadily
been replaced or partially replaced with revenue
restricted to one particular purpose or another.
If favoring ownership of this sort of property is an
issue of statewide concern, as passing this bill would
indicate, then the state should use statewide revenues
to reimburse counties and other local agencies for
their losses, as provided by statute.
The Assembly Revenue and Taxation Committee staff comments:
1)What is a "tax expenditure?" Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. In the late 1960s, United States (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). This bill would enact a new tax
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expenditure program, in the form of a property tax exemption
for space flight property.
How is a tax expenditure different from a direct expenditure?
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. Finally, it should also be noted
that, once enacted, it takes a two-thirds vote to rescind an
existing tax expenditure absent a sunset date. For this
reason, the author may wish to include a five-year sunset date
for this exemption, to provide the opportunity for future
legislative review.
2)What is taxable? California Constitution, Article XIII,
Section 1 states that, unless otherwise exempt as provided by
the State Constitution or the laws of the U.S., all property
is taxable. Taxable property is either real property or
personal property. Therefore, all personal property is
taxable unless it is exempt by legislature with a two-thirds
vote. SpaceX is attempting to obtain an exemption from
personal property tax for qualified property that has space
flight capacity, (i.e., space rockets). Because space flight
property is classified as personal property, SpaceX must show
it falls under an existing exemption. If the property does
not qualify under an exemption, by default, it is taxed.
3)Existing exemption. Business inventories are exempt from tax
under Revenue and Taxation Code Section 129. The exemption
generally applies to TPP that is held for sale or lease in the
ordinary course of business. In order to qualify under the
inventory exemption, a space rocket would have to be sold or
leased in the regular course of business. However, it is
unclear if SpaceX actually sells or leases the rockets it
manufactures. It appears that SpaceX, instead, provides a
service, (i.e., delivering items into space). SpaceX might
argue that although it does not sell the rockets, the service
provided amounts to a sale since portions of the rockets are
destroyed on re-entry. From the information provided to the
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Assembly Revenue and Taxation Committee, it does not appear
that the rockets fall under the inventory exemption because
they are not clearly sold or leased in the normal course of
business. However, the rockets could potentially qualify
under another exemption.
Article XIII, Section 3, subdivision (l) of the California
Constitution provides that vessels of more than 50 tons burden
and engaged in the transportation of freight or passengers are
exempt from property taxation. To qualify for the exemption,
a vessel must be exclusively engaged in the transportation of
freight or passengers or at least primarily so engaged. While
the language is clearly intended to apply only to vessels,
SpaceX may argue that it should be afforded a similar
exemption because it provides a similar service.
Assuming the rockets are not inventory and fall under no other
personal property tax exemption, the Legislature maintains the
authority to exempt personal property. Section 2 of Article
XIII of the California Constitution provides that the
Legislature, with two-thirds of the membership of each house,
may classify personal property for differential taxation or
for exemption. Providing an exemption may encourage SpaceX to
continue investing and growing in California. However,
providing a narrow exemption for a single company may also
encourage other similarly situated companies to ask for a
personal property exemption on their business supplies.
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
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