BILL ANALYSIS �
AB 1891
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1891 (Donnelly) - As Amended: March 20, 2014
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: water desalination:
equipment
SUMMARY : Establishes a sales and use tax (SUT) exemption for
any equipment purchased to be primarily used for "water
desalination". Specifically, this bill :
1)Defines "water desalination" as a process that removes salt
and other minerals from saline water to produce fresh water
suitable for human consumption or irrigation.
2)Provides that the exemption shall remain in effect only until
January 1, 2025.
3)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for SUT revenues lost as a
result of the exemption.
4)Takes immediate effect as a tax levy, but only becomes
operative on the first day of the first calendar quarter
commencing more than 90 days after the bill's effective date.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling tangible
personal property (TPP), absent a specific exemption. The tax
is based upon the retailer's gross receipts from TPP sales in
this state.
2)Complimentary use tax on the storage, use, or other
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consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser, and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must be remitted to
the State Board of Equalization (BOE).
FISCAL EFFECT : The BOE estimates annual revenue losses of $2.7
million.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
California is facing a drought of epic proportions. While
AB 1891 will do nothing to fix the current mess that we're
in, it will be able to provide economic stability going
forward to companies that are looking to invest in
California's water infrastructure. Water desalination is a
technology that must be utilized in our already parched
state; this bill simply extends to these companies the same
courtesy we've extended to other important industries.
2)The BOE notes the following in its staff analysis of this
bill:
a) Sponsor and purpose : "The author's office has
introduced this bill as part of the solution for
California's ongoing water woes. According to the author,
costs associated with construction of a seawater
desalination operation are significant, and a sales and use
tax exemption for equipment used for desalination can
reduce these costs from 7.5% to 10%, depending on the
desalination plant's location."
b) "Equipment" should be defined : "As drafted, the bill
exempts purchases of any of equipment to be primarily used
for water desalination. It is recommended that the bill
define the term 'equipment,' consistent with the author's
intent. Desalination plants include a wide variety of
construction materials and equipment that become component
parts of the plant, such as pipes, screens, concrete, and
pumps. The plants also include and other materials used
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directly in the desalination process, for example,
chemicals, and equipment used in plant construction, such
as tools, drilling machines, and excavators. Is the intent
to include all these items? This should be clarified."
c) "Primarily" should be defined : "The term 'primarily' is
defined elsewhere in law to mean 50% or more of the time.
It is recommended that this bill similarly define the term
in order to avoid potential audit disputes."
3)Opponents of this bill note the following:
Our sales tax exemption for manufacturing equipment exists
because of the competitive position of manufacturing with
regard to other [states]. No such exemption exists for
utility equipment - of which water delivery is one -
because those have no competitive argument and must serve
California customers.
Second, water delivery is paid for by water users, not
subsidized by the General Fund. The need for water
desalination, which includes high energy costs, must be
borne in the cost of water delivery, not subsidized at the
expense of education and other services, as this bill
inappropriatly proposes.
4)Committee Staff Comments:
a) 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). This bill enacts
a new tax expenditure program, in the form of a SUT
exemption, to encourage the development of desalination
capacity in California.
b) 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
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expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater economic
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. 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.
c) Tapping the Pacific : With California facing a severe
water shortage and the driest year in recorded state
history, Governor Brown declared a drought state of
emergency on January 17, 2014. Among other things,
Governor Brown called upon all Californians to conserve
water "in every way possible." Still others have advocated
for increasing water supply by building desalination plants
that could produce millions of gallons of new drinking
water. According to an article published in the San
Francisco Chronicle, 17 plants are in the planning stages
along California's coast, including one near Concord that
is tentatively scheduled to open in 2020 and would serve
every major water agency in the Bay Area. (Fagan, Kevin.
"Desalination Plants a Pricey Option if Drought Persists."
San Francisco Chronicle, 15 Feb. 2014. Web. 11 Apr. 2014).
These plants are not without their detractors, however.
Critics have historically argued that these plants are too
expensive to run, kill fish and other marine life during
water intake, and produce greenhouse gases from the energy
required to operate. With the advent of improved
desalination technologies, however, these plants have
gained momentum. To that end, the largest desalination
plant in the Western Hemisphere is currently under
construction near San Diego, and it set to begin operations
in just two years.
d) Mapping the specific : This bill creates a SUT exemption
for equipment purchased for use in "water desalination".
Water desalination, in turn, is defined as a process that
removes salt and other minerals from saline water to
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produce fresh water suitable for human consumption or
irrigation. The absence of additional details or
definitions, however, would render this bill difficult if
not impossible to administer. For example, it is unclear
to Committee staff what kind of "equipment" would qualify
for the proposed exemption. Would qualifying equipment be
limited to equipment used directly in the desalination
process? Would equipment used primarily in administration,
management, or marketing qualify for this exemption? Would
equipment used to clean the floor of a desalination plant
be exempt? This is just one example where additional
definitional language would be helpful. Typically,
exemptions of this nature define those entities that may
purchase exempt equipment, clearly define the type of
equipment qualifying for the exemption, and further specify
how the equipment may be used. To administer this tax
expenditure program properly, the BOE would need additional
clarification on the scope of the proposed exemption.
e) What happens if the exempt equipment is later used for
non-qualifying purposes ? Under this bill, a desalination
plant could buy equipment that qualifies for the exemption,
use that equipment for a short period of time, and then
sell or transfer the equipment to another entity (e.g., an
affiliated out-of-state company). Committee staff suggests
amending this bill to eliminate the SUT exemption if the
purchased property is removed from California or is used in
a manner not qualifying for the exemption.
REGISTERED SUPPORT / OPPOSITION :
Support
Friant Water Authority
San Diego County Water Authority
Opposition
American Federation of State, County and Municipal
Employees (AFSCME), AFL-CIO
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
AB 1891
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319-2098