Amended in Senate May 6, 2014

Amended in Senate April 22, 2014

Amended in Senate April 9, 2014

Senate Bill No. 998

Introduced by Senator Knight

February 13, 2014

An act to begin insert amend Section 6377.1 of, and to end insert add Sections 17053.35 and 23635 begin delete of end delete begin insert to, end insert the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

SB 998, as amended, Knight. begin delete Income taxes: end delete begin insert Taxes: exemption and end insert credits: new aerospace projects.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill would, for taxable years beginning on or after January 1, begin delete 2016, end delete begin insert 2015, end insert allow a credit against those taxes to a qualified taxpayer begin delete in an amount equal to ____% of generated tax revenues in the taxable year from end delete begin insert equal to the amount of capital investment in end insert a new aerospace project begin insert , as defined end insert . This bill would require the Franchise Tax Board, and authorize the State Board of Equalization, to prescribe specified rules, guidelines, or procedures regarding the determination of generated tax revenues.

begin insert

Existing sales and use tax laws impose taxes on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state, and provides various exemptions from those taxes.

end insert begin insert

Existing law exempts from those taxes, on and after July 1, 2014, and before January 1, 2022, the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person for use primarily in manufacturing, processing, refining, fabricating, or recycling of property; qualified tangible personal property purchased for use by a contractor for specified purposes; and qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development, as provided, and until January 1, 2021, the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person for those purposes. This exemption does not apply to tangible personal property purchased during any calendar year that exceeds two hundred million dollars of purchases of qualified tangible personal property for which an exemption is claimed by a qualified person.

end insert begin insert

This bill would exempt the purchases of manufacturing and research and development equipment for use in a new aerospace project, as defined in this bill, from the two hundred million dollar annual limit on exempt purchases by a qualified person.

end insert

This bill would take effect immediately as a tax levy.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

begin insert

begin insert SECTION 1. end insert   

end insert

begin insert Section 6377.1 of the end insert begin insert Revenue and Taxation Code end insert
begin insert is amended to read: end insert

6377.1.  

(a) Except as provided in subdivision (e), on or after
July 1, 2014, and before July 1, 2022, there are exempted from the
taxes imposed by this part the gross receipts from the sale of, and
the storage, use, or other consumption in this state of, any of the
following:

(1) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in any stage of the
manufacturing, processing, refining, fabricating, or recycling of
tangible personal property, beginning at the point any raw materials
are received by the qualified person and introduced into the process
and ending at the point at which the manufacturing, processing,
refining, fabricating, or recycling has altered tangible personal
property to its completed form, including packaging, if required.

(2) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in research and
development.

(3) Qualified tangible personal property purchased for use by
a qualified person to be used primarily to maintain, repair, measure,
or test any qualified tangible personal property described in
paragraph (1) or (2).

(4) Qualified tangible personal property purchased for use by
a contractor purchasing that property for use in the performance
of a construction contract for the qualified person, that will use
that property as an integral part of the manufacturing, processing,
refining, fabricating, or recycling process, or as a research or
storage facility for use in connection with those processes.

(b) For purposes of this section:

(1) “Fabricating” means to make, build, create, produce, or
assemble components or tangible personal property to work in a
new or different manner.

(2) “Manufacturing” means the activity of converting or
conditioning tangible personal property by changing the form,
composition, quality, or character of the property for ultimate sale
at retail or use in the manufacturing of a product to be ultimately
sold at retail. Manufacturing includes any improvements to tangible
personal property that result in a greater service life or greater
functionality than that of the original property.

(3) “Primarily” means 50 percent or more of the time.

(4) “Process” means the period beginning at the point at which
any raw materials are received by the qualified person and
introduced into the manufacturing, processing, refining, fabricating,
or recycling activity of the qualified person and ending at the point
at which the manufacturing, processing, refining, fabricating, or
recycling activity of the qualified person has altered tangible
personal property to its completed form, including packaging, if
required. Raw materials shall be considered to have been
introduced into the process when the raw materials are stored on
the same premises where the qualified person’s manufacturing,
processing, refining, fabricating, or recycling activity is conducted.
Raw materials that are stored on premises other than where the
qualified person’s manufacturing, processing, refining, fabricating,
or recycling activity is conducted shall not be considered to have
been introduced into the manufacturing, processing, refining,
fabricating, or recycling process.

(5) “Processing” means the physical application of the materials
and labor necessary to modify or change the characteristics of
tangible personal property.

(6) (A) “Qualified person” means a person that is primarily
engaged in those lines of business described in Codes 3111 to
3399, inclusive, 541711, or 541712 of the North American Industry
Classification System (NAICS) published by the United States
Office of Management and Budget (OMB), 2012 edition.

(B) Notwithstanding subparagraph (A), “qualified person” shall
not include either of the following:

(i) An apportioning trade or business that is required to apportion
its business income pursuant to subdivision (b) of Section 25128.

(ii) A trade or business conducted wholly within this state that
would be required to apportion its business income pursuant to
subdivision (b) of Section 25128 if it were subject to apportionment
pursuant to Section 25101.

(7) (A) “Qualified tangible personal property” includes, but is
not limited to, all of the following:

(i) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.

(ii) Equipment or devices used or required to operate, control,
regulate, or maintain the machinery, including, but not limited to,
computers, data-processing equipment, and computer software,
together with all repair and replacement parts with a useful life of
one or more years therefor, whether purchased separately or in
conjunction with a complete machine and regardless of whether
the machine or component parts are assembled by the qualified
person or another party.

(iii) Tangible personal property used in pollution control that
meets standards established by this state or any local or regional
governmental agency within this state.

(iv) Special purpose buildings and foundations used as an
integral part of the manufacturing, processing, refining, fabricating,
or recycling process, or that constitute a research or storage facility
used during those processes. Buildings used solely for warehousing
purposes after completion of those processes are not included.

(B) “Qualified tangible personal property” shall not include any
of the following:

(i) Consumables with a useful life of less than one year.

(ii) Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products that have
completed the manufacturing, processing, refining, fabricating, or
recycling process.

(iii) Tangible personal property used primarily in administration,
general management, or marketing.

(8) “Refining” means the process of converting a natural
resource to an intermediate or finished product.

(9) “Research and development” means those activities that are
described in Section 174 of the Internal Revenue Code or in any
regulations thereunder.

(10) “Useful life” for tangible personal property that is treated
as having a useful life of one or more years for state income or
franchise tax purposes shall be deemed to have a useful life of one
or more years for purposes of this section. “Useful life” for tangible
personal property that is treated as having a useful life of less than
one year for state income or franchise tax purposes shall be deemed
to have a useful life of less than one year for purposes of this
section.

(c) An exemption shall not be allowed under this section unless
the purchaser furnishes the retailer with an exemption certificate,
completed in accordance with any instructions or regulations as
the board may prescribe, and the retailer retains the exemption
certificate in its records and furnishes it to the board upon request.

(d) (1)    Notwithstanding the Bradley-Burns Uniform Local
Sales and Use Tax Law (Part 1.5 (commencing with Section 7200))
and the Transactions and Use Tax Law (Part 1.6 (commencing
with Section 7251)), the exemption established by this section
shall not apply with respect to any tax levied by a county, city, or
district pursuant to, or in accordance with, either of those laws.

(2) Notwithstanding subdivision (a), the exemption established
by this section shall not apply with respect to any tax levied
pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant
to Section 35 of Article XIII of the California Constitution, or any
tax levied pursuant to Section 6051 or 6201 that is deposited in
the State Treasury to the credit of the Local Revenue Fund 2011
pursuant to Section 6051.15 or 6201.15.

(e) (1) The exemption provided by this section shall not apply
to either of the following:

(A) begin delete   end delete begin delete Any end delete begin insert   end insert begin insert (i) end insert begin insert   end insert begin insert Except as provided in clause (ii), any end insert tangible
personal property purchased during any calendar year that exceeds
two hundred million dollars ($200,000,000) of purchases of
qualified tangible personal property for which an exemption is
claimed by a qualified person under this section. For purposes of
this subparagraph, in the case of a qualified person that is required
to be included in a combined report under Section 25101 or
authorized to be included in a combined report under Section
25101.15, the aggregate of all purchases of qualified personal
property for which an exemption is claimed pursuant to this section
by all persons that are required or authorized to be included in a
combined report shall not exceed two hundred million dollars
($200,000,000) in any calendar year.

begin insert

(ii) Manufacturing and research and development equipment
purchased for use in a new aerospace project as defined in Sections
17053.35 and 23635 shall not be considered for purposes of the
two-hundred-million-dollar ($200,000,000) limit established by
clause (i).

end insert

(B) The sale or storage, use, or other consumption of property
that, within one year from the date of purchase, is removed from
California, converted from an exempt use under subdivision (a)
to some other use not qualifying for exemption, or used in a manner
not qualifying for exemption.

(2) If a purchaser certifies in writing to the seller that the tangible
personal property purchased without payment of the tax will be
used in a manner entitling the seller to regard the gross receipts
from the sale as exempt from the sales tax, and the purchase
exceeds the two-hundred-million-dollar ($200,000,000) limitation
described in subparagraph (A) of paragraph (1), or within one year
from the date of purchase, the purchaser removes that property
from California, converts that property for use in a manner not
qualifying for the exemption, or uses that property in a manner
not qualifying for the exemption, the purchaser shall be liable for
payment of sales tax, with applicable interest, as if the purchaser
were a retailer making a retail sale of the tangible personal property
at the time the tangible personal property is so purchased, removed,
converted, or used, and the cost of the tangible personal property
to the purchaser shall be deemed the gross receipts from that retail
sale.

(f) This section shall apply to leases of qualified tangible
personal property classified as “continuing sales” and “continuing
purchases” in accordance with Sections 6006.1 and 6010.1. The
exemption established by this section shall apply to the rentals
payable pursuant to the lease, provided the lessee is a qualified
person and the tangible personal property is used in an activity
described in subdivision (a).

(g) (1) Upon the effective date of this section, the Department
of Finance shall estimate the total dollar amount of exemptions
that will be taken for each calendar year, or any portion thereof,
for which this section provides an exemption.

(2) No later than each March 1 next following a calendar year
for which this section provides an exemption, the board shall
provide to the Joint Legislative Budget Committee a report of the
total dollar amount of exemptions taken under this section for the
immediately preceding calendar year. The report shall compare
the total dollar amount of exemptions taken under this section for
that calendar year with the department’s estimate for that same
calendar year. If that total dollar amount taken is less than the
estimate for that calendar year, the report shall identify options for
increasing exemptions taken so as to meet estimated amounts.

(h) This section is repealed on January 1, 2023.

begin delete SECTION 1. end delete
begin insert SEC. 2. end insert   

Section 17053.35 is added to the Revenue and Taxation
Code, to read:

17053.35.  

(a) For taxable years beginning on or after January
1, begin delete 2016, end delete begin insert 2015, end insert there shall be allowed to a qualified taxpayer a
credit against the “net tax,” as defined in Section 17039, an amount
equal to begin delete ____ percent (____%) of generated tax revenues in the
taxable year from end delete begin insert the amount of capital investment in end insert a new
aerospace project.

(b) For purposes of this section, all of the following shall apply:

begin delete

(1) (A) “Generated tax revenues” means the amount equal to
sum of the following amounts:

(i) The difference between the “net tax,” as defined in Section
17039, of the qualified taxpayer in the taxable year and the
estimated “net tax” of the qualified taxpayer, if the new aerospace
project of the qualified taxpayer was not in this state, in the taxable
year. If the difference is zero or less than zero, then the amount
shall be zero.

(ii) The amount of ad valorem property tax attributable to any
increases in assessed valuation of real property due to the purchase
or new construction of real property by the qualified taxpayer that
is primarily used for the new aerospace project.

(B) If the amount of generated tax revenues determined in
subparagraph (A) exceeds one hundred million dollars
($100,000,000), the amount to be used for purposes of calculating
the amount of credit allowed under this section shall be one
hundred million dollars ($100,000,000).

end delete begin insert

(1) “Capital investment” means expenses incurred for site
preparation for, and the construction, repair, renovation,
improvement, equipping, or furnishing of, a building, structure,
or facility or improvement to real property, including associated
soft costs. Capital investment includes obtaining and installing
furnishings and machinery, apparatus, or equipment for the
operation of a business in a building, structure, or facility or
improvement to real property, site- related utility and
transportation infrastructure improvements, and plantings or other
environmental components.

end insert

(2) “Manufacturing” means the activity of converting or
conditioning property by changing the form, composition, quality,
or character of the property for ultimate sale at retail or use in the
manufacturing of a product to be ultimately sold at retail begin insert or to a
government customer end insert . Manufacturing includes any improvements
to tangible personal property that result in a greater service life or
greater functionality than that of the original property.

(3) “New aerospace project” means the manufacturing begin insert , design,
or testing end insert of aircraft, aircraft engine, guided missiles, space
vehicles, propulsion units, or related parts begin insert or component end insert begin insert s end insert by the
qualified taxpayer, pursuant to a contractual agreement between
the qualified taxpayer and a purchaser, that commences in this
state on or after January 1, begin delete 2016, end delete begin insert 2015, end insert and has not commenced
outside of this state prior to that date.

(4) “New construction” has the same meaning as that term is
defined in Section 70.

(5) “Primarily” means more than 50 percent.

(6) “Qualified taxpayer” means a person who is primarily
engaged in those lines of business described in Code 3364 of the
North American Industry Classification System (NAICS) published
by the United States Office of Management and Budget (OMB),
2012 edition.

(c) No credit shall be allowed under this section after the
conclusion or completion of the contractual agreement that is the
subject of the new aerospace project.

(d) In the case where the credit allowed by this section exceeds
the “net tax,” the excess may be carried over to reduce the “net
tax” in the following year, and succeeding nine years if necessary,
until the credit is exhausted.

(e) (1) The Franchise Tax Board shall prescribe rules,
guidelines, or procedures to be used by the qualified taxpayer to
determine its estimated “net tax” amount described in clause (i)
of subparagraph (A) of paragraph (1) of subdivision (b), and may
prescribe other rules, guidelines, or procedures necessary or
appropriate to carry out the purposes of this section, except as
provided in paragraph (2).

(2) The State Board of Equalization may prescribe rules,
guidelines, or procedure necessary or appropriate for the
determination of the amount of increased ad valorem property tax
described in clause (ii) of subparagraph (A) of paragraph (1) of
subdivision (b).

begin delete SEC. 2. end delete
begin insert SEC. 3. end insert   

Section 23635 is added to the Revenue and Taxation
Code, to read:

23635.  

(a) For taxable years beginning on or after January 1,
begin delete 2016, end delete begin insert 2015, end insert there shall be allowed to a qualified taxpayer a credit
against the “tax,” as defined in Section 23036, an amount equal
to begin delete ____ percent (____%) of generated tax revenues in the taxable
year from end delete begin insert the amount of capital investment in end insert a new aerospace
project.

(b) For purposes of this section, all of the following shall apply:

begin delete

(1) (A) “Generated tax revenues” means the amount equal to
sum of the following amounts:

(i) The difference between the “tax,” as defined in Section
23036, of the qualified taxpayer in the taxable year and the
estimated “tax” of the qualified taxpayer, if the new aerospace
project of the qualified taxpayer was not in this state, in the taxable
year. If the difference is zero or less than zero, then the amount
shall be zero.

(ii) The amount of ad valorem property tax attributable to any
increases in assessed valuation of real property due to the purchase
or new construction of real property by the qualified taxpayer that
is primarily used for the new aerospace project.

(B) If the amount of generated tax revenues determined in
subparagraph (A) exceeds one hundred million dollars
($100,000,000), the amount to be used for purposes of calculating
the amount of credit allowed under this section shall be one
hundred million dollars ($100,000,000).

end delete begin insert

(1) “Capital investment” means expenses incurred for site
preparation for, and the construction, repair, renovation,
improvement, equipping, or furnishing, of a building, structure,
or facility or improvement to real property, including associated
soft costs. Capital investment includes obtaining and installing
furnishings and machinery, apparatus, or equipment for the
operation of a business in a building, structure, or facility or
improvement to real property, site- related utility and
transportation infrastructure improvements, and plantings or other
environmental components.

end insert

(2) “Manufacturing” means the activity of converting or
conditioning property by changing the form, composition, quality,
or character of the property for ultimate sale at retail or use in the
manufacturing of a product to be ultimately sold at retail begin insert or to a
government customer end insert . Manufacturing includes any improvements
to tangible personal property that result in a greater service life or
greater functionality than that of the original property.

(3) “New aerospace project” means the manufacturing begin insert , design,
or testing end insert of aircraft, aircraft engine, guided missiles, space
vehicles, propulsion units, or related parts begin insert or components end insert by the
qualified taxpayer, pursuant to a contractual agreement between
the qualified taxpayer and a purchaser, that commences in this
state on or after January 1, begin delete 2016, end delete begin insert 2015, end insert and has not commenced
outside of this state prior to that date.

(4) “New construction” has the same meaning as that term is
defined in Section 70.

(5) “Primarily” means more than 50 percent.

(6) “Qualified taxpayer” means a person who is primarily
engaged in those lines of business described in Code 3364 of the
North American Industry Classification System (NAICS) published
by the United States Office of Management and Budget (OMB),
2012 edition.

(c) No credit shall be allowed under this section after the
conclusion or completion of the contractual agreement that is the
subject of the new aerospace project.

(d) In the case where the credit allowed by this section exceeds
the “net tax,” the excess may be carried over to reduce the “net
tax” in the following year, and succeeding nine years if necessary,
until the credit is exhausted.

(e) (1) The Franchise Tax Board shall prescribe rules,
guidelines, or procedures to be used by the qualified taxpayer to
determine its estimated “net tax” amount described in clause (i)
of subparagraph (A) of paragraph (1) of subdivision (b), and may
prescribe other rules, guidelines, or procedures necessary or
appropriate to carry out the purposes of this section, except as
provided in paragraph (2).

(2) The State Board of Equalization may prescribe rules,
guidelines, or procedure necessary or appropriate for the
determination of the amount of increased ad valorem property tax
described in clause (ii) of subparagraph (A) of paragraph (1) of
subdivision (b).

begin delete SEC. 3. end delete
begin insert SEC. 4. end insert   

This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.