BILL ANALYSIS �
AB 2114
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2114 (Pan) - As Amended: April 22, 2014
SUSPENSE
2/3 vote. Fiscal committee.
SUBJECT : Taxation: qualified heavy equipment
SUMMARY : Imposes a tax on every "qualified rentee" of
"qualified heavy equipment" (QHE) at the rate of 0.75% of the
"rental price". Specifically, this bill :
1)Provides that, for the 2015-16 Fiscal Year (FY) and for each
FY thereafter, this tax shall be in lieu of any property tax
on QHE.
2)Defines a "qualified rentee" as a rentee that rents QHE from a
"qualified renter". Further specifies that the term does not
include a "qualified renter" who rents from another "qualified
renter".
3)Defines "QHE" as construction, earthmoving, or industrial
equipment that is mobile, including attachments. The term
specifically includes all of the following:
a) A self-propelled vehicle that is not designed to be
driven on the highway;
b) Industrial electrical generation equipment;
c) Industrial lift equipment;
d) Industrial material equipment; and,
e) Equipment used in shoring, shielding, and ground
trenching.
4)Specifies that QHE is mobile if the equipment is not intended
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to be permanently affixed to real property for purposes of its
intended use. Moreover, QHE is mobile if it is intended to be
moved among worksites as needed.
5)Defines "rental price" as the total amount of the charge for
renting the QHE, excluding any separately stated charges,
including those for delivery and pickup fees, damage waivers,
environmental mitigation fees, or use taxes.
6)Defines a "qualified renter" as a renter that satisfies all
the following conditions:
a) The renter's principal business is the short-term rental
of QHE; and,
b) The renter is engaged in a line of business described in
Code 532412 of the North American Industry Classification
System (NAICS) published by the United States Office of
Management and Budget, 2012 edition.
7)Specifies that the terms "renting" and "rent" refer to a
rental for a period of less than one year or for an undefined
period.
8)Requires the qualified renter to collect the tax from the
qualified rentee at the time of rental and remit the tax to
the State Board of Equalization (BOE).
9)Provides that every qualified rentee who rents QHE in this
state is liable for the tax until it has been paid to this
state, except that payment to a qualified renter relieves the
qualified rentee from further liability for the tax.
10)Requires the qualified renter to separately state the amount
of the tax on any contract, receipt, invoice, or other similar
document provided at the time of rental.
11)Requires the BOE to administer and collect the tax pursuant
to the Fee Collection Procedures Law.
12)Requires every qualified renter required to collect the tax
to register with the BOE.
13)Provides that the taxes shall be due and payable to the BOE
quarterly on or before the last day of the month next
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succeeding each quarterly period.
14)Provides that all revenues, interest, penalties, and other
amounts collected, less refunds and the BOE's administrative
costs, shall be deposited in the General Fund (GF).
15)Provides that QHE of a business that is not for rent shall
remain subject to any applicable property taxes.
16)Specifies that this bill's provisions shall not apply to any
rental contract for QHE that was entered into before this
bill's operative date.
17)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any property tax revenues
lost as a result of this bill.
18)Provides that, for the 2015-16 FY and for each FY thereafter,
each county auditor shall do both of the following:
a) Increase the total amount of ad valorem property tax
revenue that is otherwise required to be allocated among
the county and each city and special district in the county
by the "QHE reimbursement amount". The QHE reimbursement
amount shall be allocated among the county, cities, and
special districts in proportion to the amounts of ad
valorem property tax revenue otherwise allocated among
those local agencies; and,
b) Decrease the total amount of ad valorem property tax
revenue otherwise required to be allocated to the county's
Educational Revenue Augmentation Fund (ERAF) by the "QHE
reimbursement amount".
19)Provides additional instruction to county auditors in the
event that a county's ERAF does not have sufficient funds to
offset the QHE reimbursement amount, as specified.
20)Defines "QHE reimbursement amount" as the total amount of ad
valorem property tax revenue received by the county and each
city and special district in the county in the 2013-14 FY from
renters of QHE.
21)Provides that, for the 2016-17 FY and for each FY thereafter,
ad valorem property tax revenue allocations made under Revenue
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and Taxation Code Sections 96.1 and 96.5 shall not incorporate
the allocation adjustments noted above.
EXISTING LAW :
1)Provides that all property is taxable absent a specific
constitutional or statutory exemption.
2)Authorizes the Legislature to classify personal property for
differential taxation or for exemption by means of a statute
approved by a 2/3 vote of the membership of each house.
3)Requires the Legislature to reimburse local agencies annually
for certain property tax revenues lost as a result of any
exemption or classification of property for purposes of ad
valorem property taxation.
FISCAL EFFECT : The BOE estimates that the new tax would
generate roughly $16.7 million in revenues annually. The BOE
notes, however, that it lacks information regarding the property
tax revenues currently paid by renters of QHE. Nevertheless,
the BOE notes that in 2013, the Legislative Analyst's Office
(LAO) indicated that property tax on rental equipment likely
generates $20 to $25 million annually for local governments.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Currently the personal property tax owed each year is
figured on a tax rate of 1.25%. The tax is based on each
piece of rented equipment's valuation on January 1 of each
year.
AB 2114 would change this method and instead impose a rate
of [0.75%] of the rental receipts from the short-term
leases or rental receipts of a person whose principal
business is derived from the short-term rental of heavy
equipment property. This fee is in lieu of the personal
property tax currently imposed on heavy equipment rental
property and will be collected from rental customers on
each rental invoice. The tax will be administered and
collected by the Board of Equalization. Counties will
receive a greater share of the real property tax to
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backfill the loss of personal property tax.
This bill will alleviate concerns and provide a more level
playing field for companies that rent out heavy equipment
by imposing a fee at a rate of .75% of the rental receipts
from the short rental receipts of a person whose principal
business is derived from the short-term rental of heavy
equipment property. This bill will allow businesses that
rent or lease heavy equipment to spread out their tax
payments by collecting the property tax from rental
customers on each rental invoice.
2)The BOE notes the following in its staff analysis of this
bill:
a) Sponsor and purpose : "As the sponsor, the author's
office notes that some heavy equipment rental companies
contend that subjecting heavy equipment to personal
property taxation results in both unfairness and
administrative inconsistencies. Specifically, rental
companies with multiple locations in the state are
subjected to numerous audits each year in different
jurisdictions. In addition, they state that different
county assessors use different methods for valuing mobile
construction equipment. This measure is intended to
address that unfairness and inconsistency."
b) In lieu of personal property taxation : "Heavy
equipment, as described in the bill, is regarded as
personal property upon which property tax is assessed. As
personal property, the Legislature is constitutionally
authorized to provide for a differential tax, such as the
tax proposed in this bill. A similar differential tax on
personal property applies to vehicles. In 1936, the
creation of the Vehicle License Fee removed vehicles from
local county assessment and subjected them to a Department
of Motor Vehicles-administered vehicle license fee. The
fee is in lieu of the property tax under current law.
[Citation omitted]. The 1936 change stemmed from the
inability to effectively assess and collect taxes on
vehicles via the property tax. Noted problems at the time
included significant tax evasion, relatively high
administrative costs, and little statewide uniformity in
values assigned to similar vehicles."
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c) Who is a "qualified renter? " "The bill defines a
qualified renter as one whose principal business is the
short-term rental of qualified heavy equipment and who is
engaged in a business described in NAICS Industry Code
532412. This code describes establishments that are
primarily engaged in a line of business renting or leasing
heavy equipment without operators that may be used for
construction, mining, or forestry. This includes
bulldozers, earthmoving equipment, oil well or other
well-drilling machinery and equipment, logging, or cranes."
d) Cost estimate : "BOE administrative costs related to
this bill are likely to be significant. These costs
include taxpayer identification, notification, and
registration; regulation development; manual and
publication revisions; tax return design; computer
programming; return, payment, and refund claim processing;
audit and collection tasks; staff training; and public
inquiry responses."
3)Committee Staff Comments:
a) California's property tax : Personal property used in a
trade or business is generally taxable, and is valued each
lien date (i.e., January 1) at its current fair market
value, taking into account the property's age and
condition. The tax rate applied to personal property is
the same as that applied to real property<1> - 1% plus
voter-approved debt rates used to finance local
infrastructure projects.<2>
Historically, all business property was subject to
taxation. In 1979, however, the Legislature established a
"business inventory exemption" to remove any incentives
-------------------------
<1> Real property includes land, buildings, and other permanent
structures, whereas personal property primarily consists of
business property, such as manufacturing equipment, computer
systems, and rental equipment. The LAO notes that, in FY
2010-11, personal property accounted for roughly 4% of the total
taxable value of all property in California and generated about
$2 billion in property taxes.
<2> The LAO notes that, in 2013, the statewide average rate,
inclusive of voter-approved debt rates, was 1.19% of assessed
value.
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companies had to locate their product inventories in other
states. Thus, rental equipment that is not being leased or
rented on the January 1 lien date
qualifies as business inventory and is exempt from
taxation. As a result, the LAO notes that rental companies
only pay annual property taxes on the portion of their
equipment - typically 60 to 75% - that is rented on the
lien date.
b) The distribution of property tax revenues : Generally,
personal property tax revenues are allocated according to
the property's "situs" (i.e., location) and accrue only to
those taxing jurisdictions in the tax rate area where the
property is located. Pursuant to Property Tax Rule 204,
property rented on a daily, weekly, or other short-term
basis of six months or less, has situs at the place where
the owner normally keeps the property. The BOE notes that,
"[f]or property rented for an extended, but unspecified,
period or more than a 6-month term" the assessor determines
situs based on the rentee's use.
c) The current proposal : Some heavy equipment rental
companies contend that subjecting heavy equipment to
personal property taxation results in both unfairness and
"administrative inconsistencies." Specifically, proponents
contend that rental companies with multiple locations in
the state are subjected to numerous audits each year in
different jurisdictions. In addition, proponents argue
that different county assessors use different methods for
valuing mobile construction equipment. This bill addresses
these concerns by permanently exempting QHE from property
taxation and by imposing an "in lieu" tax on the rentees of
QHE.
d) A precedent for ad hoc treatment ? Committee staff
appreciates that the current system of personal property
taxation poses certain administrative difficulties for
heavy equipment rental companies. The LAO notes that large
rental companies have as many as 500 rental pieces at each
branch and that their rental fleets move regularly between
branches based on project demand. That said, this is by no
means the only industry that faces challenges resulting
from operating in numerous counties. Moreover, conflicts
concerning the proper valuation of business property are
part and parcel of the current system. These
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administrative difficulties have even led some to question
the overall utility of the personal property tax as a
mechanism for efficiently raising revenues. To this end,
the LAO has noted:
Due to its market value assessment, appeals workload,
and audit requirements, the personal property tax is a
relatively costly tax for businesses to comply with
and for county assessors to administer, especially
when compared with the property tax as it applies to
real property.
That said, the Committee may wish to consider the inherent
drawbacks of adopting an ad hoc approach designed to
alleviate the burdens faced by one industry. Such action
could establish a precedent for other industries seeking
special treatment based on the peculiar nature of their
business model.
e) Increased contractor costs ? The economic burden of the
personal property tax is currently factored into the prices
charged by heavy equipment rental companies. If this bill
were enacted, such companies would receive the benefit of a
tax exemption and would instead collect an "in lieu" tax
from rentees of QHE. Thus, if rental companies fail to
pass along their property tax savings in the form of lower
base rental charges, this will potentially result in
increased costs to contractors and a windfall for rental
companies.
f) Shifting the incidence of taxation : Beyond the scope of
the financial burdens involved, this bill also shifts the
legal incidence of taxation from the renter to the rentee.
This seems somewhat ill-advised from an administrative
vantage point. For example, while this bill directs
renters to collect the tax from their customers, what would
happen if they fail to do so? What happens if they collect
less than what is owed? Would the BOE be able to collect
this shortfall directly from the renter or would it be
forced to pursue collections from the numerous contractors
that rented the equipment? It may be preferable to follow
the model of the sales tax, wherein the legal incidence of
the tax is imposed on retailers. These retailers, in turn,
are then specifically authorized to collect "reimbursement"
for this tax from their customers.
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g) Making things "whole" : Obviously, a personal property
tax exemption raises the prospect of decreased local
government revenues. This bill addresses this issue by
directing county auditors to:
i) Increase the total amount of property tax revenue to
be allocated by a "QHE reimbursement amount"; and
simultaneously,
ii) Decrease contributions to the county's ERAF by the
same amount.
In this way, local governments will theoretically be made
whole. The state, however, will be required to "backfill"
these ERAF reductions. At the same time, the state GF will
receive all revenues generated by the new in lieu tax on
QHE (after deducting the BOE's administrative costs).
It appears unlikely, based on present estimates, that these
new GF revenues will offset the state's increased ERAF
responsibilities. Specifically, while the new tax is
estimated to generate $16.7 million annually, the LAO has
estimated that foregone property tax revenues could be as
high as $25 million. Any delta between the two would
represent a loss to the state's GF. The Committee may wish
to consider whether it is appropriate to shift this
"downside" risk to the state.
At the same time, it does not appear that anyone actually
knows the precise amount of property tax revenues currently
generated through the taxation of QHE. This could
obviously make the auditor's job of calculating a "QHE
reimbursement amount" somewhat challenging.
h) Administrative concerns : Beyond the policy issues
raised above, this bill also raises certain administrative
concerns. These range from defining key terms such as the
"principal business of the renter" to clarifying exactly
how the transition between a personal property tax regime
and a new in lieu tax regime is to occur. Committee staff
is available to work with the author's office to address
these and any other issues that may be identified.
i) Suggested technical amendments :
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i) On page 4, in line 29, strike "Division 2" and
insert "Division 1";
ii) On page 5, in line 6, strike "rental" and insert
"heavy"; and,
iii) On page 5, delete line 10 containing the definition
of "local entity" as that term is not used in the
language of the bill.
j) Related legislation :
i) AB 1055 (Pan) would have imposed an in lieu tax on
every qualified rentee of QHE at an unspecified rate. AB
1055 was never heard by this Committee and was returned
to the Chief Clerk.
ii) AB 1941 (Ma), of the 2011-12 Regular Session, would
have imposed an in lieu tax on every qualified lessee of
QHE at the rate of 1.25% of the gross receipts from the
lease or rental of QHE. AB 1941 was held in this
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098