Existing law requires the labeling and registration, as specified, of fertilizing materials, including organic input materials. Organic input materials are commercial fertilizers, agricultural minerals, auxiliary soil and plant substances, specialty fertilizers, or soil amendments, excluding pesticides, that are to be used in organic crop and food production and that comply with specified national standards.

Existing law requires all moneys, except for fines and penalties, collected by the State Air Resources Board from the auction or sale of allowances as part of a market-based compliance mechanism relative to reduction of greenhouse gas emissions, to be deposited in the Greenhouse Gas Reduction Fund.

This bill would require the Secretary of Food and Agriculture, on or before June 30, 2016, to provide to the Legislature a plan to expand the Department of Food and Agricultures promotion of organic input materials for the production of food and fiber. The bill would express the Legislatures intent that the secretarys plan and the departments promotion of organic input materials be funded, all or in part, by the Greenhouse Gas Reduction Fund. The bill would make findings and declarations regarding the ways in which agricultural practices, including the application of fertilizer, remove carbon dioxide from the atmosphere.

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1247 (

Author:Irwin) – As Amended Ver:March 24, 2015

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: organic input material.

SUMMARY: Provides a sales and use tax (SUT) exemption for "organic input material" to be applied to land, the products of which are to be used as food for human consumption or are to be sold in the regular course of business. Specifically, this bill:

1. Defines "organic input material" as auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that complies with the requirements of the National Organic Program standards, as specified in the Code of Federal Regulations.

2. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.

3. 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 this bill's effective date.

EXISTING LAW:

1. Imposes a 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. Imposes a complimentary use tax on the storage, use, or other 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 generally be remitted to the State Board of Equalization (BOE).
   
   

3. Provides a SUT exemption for all of the following:
   
   

   1. Any form of animal life the products of which ordinarily constitute food for human consumption;
      
      

   2. Feed for any form of animal life the products of which ordinarily constitute food for human consumption or are to be sold in the regular course of business;
      
      

   3. Seeds and plants the products of which ordinarily constitute food for human consumption or are to be sold in the regular course of business;
      
      

   4. Fertilizer to be applied to land the products of which are to be used as food for human consumption or are to be sold in the regular course of business; and,
      
      

   5. Drugs or medicines, including oxygen, the primary purpose of which is the prevention or control of disease, that are administered to animal life the products of which ordinarily constitute food for human consumption.

FISCAL EFFECT: The BOE estimates that this bill will reduce state and local revenues by $1 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

The state has numerous goals promoting the creation and use of compost. Composting diverts organic waste from the landfill and has been identified as a cost effective method to reduce greenhouse gas emissions. Further, the application of compost in agriculture and landscaping has been shown to offer significant soil carbon sequestration and water quality benefits, provide erosion control, reduce the need for synthetic and fertilizers and pesticides, and conserve water and energy required for irrigation.

Though compost provides significant benefits to our economy and environment, it remains unclear in tax code and in its enforcement, as to which organic input materials are exempt from sales tax. AB 1247 seeks to clarify that all certified organic input material used for food production are exempt from sales tax.

2. This bill is sponsored by the California Compost Coalition, which notes the following:

AB 856 approved by the Legislature and signed by the Governor in 2009, revised the definition of fertilizer to include organic input materials in order for organic soil amendments to share the same tax relief as petroleum based fertilizers.

In the case of Agromin, its compost meets the definition of an organic input material under Section 14550.5 and thus qualifies as a fertilizing material. However, the SBE (State Board of Equalization) is requiring Agromin to register its primary product as a specialty fertilizer – rather than as compost – with the CDFA even though Agromin's compost is delivered to its commercial agricultural customers as an agricultural mineral and a fertilizing material identified as an organic input material. It is OMRI (Organic Material Review Institute) listed as a crop fertilizer and registered with CDFA as an Organic Input Material.

Despite AB 856 there continues to be inconsistent interpretations of what organic input material is exempt and what is not because the SBE uses definitions in the Tax Code and not the Food and Agriculture Code. We need statutory clarification that all OMRI certified organic input material will qualify for the same food tax sales [sic] exemption.

Consequently, Agromin has been directed to collect sales taxes and even refund back taxes. This is both grossly inequitable and directly contrary to the Administration's initiative to promote healthy soils.

3. The BOE notes the following in its staff analysis of this bill:

   1. Effect of the bill: "This bill exempts from sales and use tax the sales of certain organic input materials to be applied to land, provided the land is used to produce food products or products to be sold in the regular course of business. The bill defines 'organic input material' as auxiliary soil and plant substances, specialty fertilizers, and soil amendments that comply with the National Organic Program standards. Accordingly, based on BOE's Sales and Use Tax Regulation 1588, sales of non-organic auxiliary soil and plant substances and soil amendments would remain subject to tax."

   2. Identifying exempt organic input material products appears uncomplicated: "The CDFA's Organic Input Material Program registers and maintains a list of organic input materials on its website. The list includes the firm name and product, brand name, or trademark information."

   3. Sales and use tax exemption of fertilizer applies to organic and non-organic fertilizers: "As previously stated, Regulation 1588 defines the term 'fertilizer' to include commercial fertilizers, agricultural minerals, manure, and carbon dioxide. The terms commercial fertilizer and agricultural minerals are defined in the FAC and include both organic and non-organic substances. To qualify for the exemption, the fertilizer must be applied to land to produce food, feed for food animals (including pasture grasses), and products to be sold by the purchaser (e.g., flowers). Auxiliary soil and plant substances and soil amendments (organic and non-organic) are specifically excluded from the definition of fertilizer, and are thus subject to tax."

   4. Definition of "organic input material": "Organic input material" is defined in FAC Section 14550.5 [. . .]. The bill's definition of organic input material is similar to Section 14550.5, with the exception that it does not include the terms 'commercial fertilizer' or 'agricultural mineral' and does not require that the organic input material is to be used in organic crop and food production. According to the author's office, the bill's definition does not include these terms because they are already exempt under current law. Additionally, the proposed exemption is intended to apply to organic input material used in both organic and non-organic crop and food production. To avoid confusion, BOE staff recommends using [the] Section 14550.5 definition for organic input material, and including a provision to specify, notwithstanding Section 14550.5, organic input material may be used in non-organic farming. BOE staff will work with the author's office to address this concern."

4. 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, 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).
      
      

   2. 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. While this affords taxpayers greater financial predictability, 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 or cost, without a supermajority vote.

   3. An overview of the SUT Law: California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other 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 generally be remitted to the BOE.

The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In fiscal year (FY) 2014-15, SUT revenues are estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

4. What accounts for the state's reduced reliance on SUT revenues? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

5. The SUT exemption for fertilizer: As noted above, existing law provides a complete SUT exemption for "[f]ertilizer to be applied to land the products of which are to be used as food for human consumption or are to be sold in the regular course of business." (Revenue and Taxation Code Section 6358(d).) BOE SUT Regulation 1588, in turn, defines the term "fertilizer" to include "commercial fertilizers", "agricultural minerals", "manure", and carbon dioxide. Each of these terms is further defined as follows:

   1. "Commercial fertilizer": This term is defined by reference to Food and Agricultural Code (FAC) Section 14522 as any substance containing 5% or more of nitrogen (N), available phosphoric acid (P2O5), or soluble potash (K2O), singly or collectively, which is distributed in this state for promoting or stimulating plant growth. "Commercial fertilizer" includes both agricultural and specialty fertilizers. "Specialty fertilizers" may contain less than 5% nitrogen (N), available phosphoric acid (P2O5), or soluble potash (K2O), singly or collectively.

   2. "Agricultural minerals": This term is defined by reference to FAC Section 14512 as any substance with nitrogen (N), available phosphoric acid (P2O5), and soluble potash (K2O), singly or in combination, in amounts less than 5% which is distributed for farm use, or any substance only containing recognized essential secondary nutrients or micronutrients in amounts equal or greater than minimum amounts specified by regulation and distributed in this state as a source of these nutrients for the purpose of promoting plant growth. This term specifically includes gypsum, liming materials, manure, wood fly ash, sewage sludge not qualifying as commercial fertilizer, and captured dilute solutions.

   3. "Manure": This term is defined as the excreta of any domestic animal or domestic fowl which is not artificially mixed with any material except a material which has been used for bedding, sanitary, or feeding purposes for such an animal or fowl or for the preservation of the manure.

BOE SUT Regulation 1588 specifically excludes from the definition of "fertilizer" both "packaged soil amendments" and "auxiliary soil and plant substances" defined as follows:

1. "Packaged soil amendments": This term is generally defined by reference to FAC Section 14552 as any substance distributed for the purpose of promoting plant growth or improving the quality of crops by conditioning soils solely through physical means. The term includes:

   1. Hay;

   2. Straw;

   3. Peat moss;

   4. Leaf mold;

   5. Sand;

   6. Wood products;

   7. Any product or mixture of products intended for use as a potting medium, planting mix, or soilless growing media; and,

   8. Any other substance or product which is intended for use solely because of its physical properties.

2. "Auxiliary soil and plant substances": This term is generally defined by reference to FAC Section 14513 as any chemical or biological substance or mixture of substances or device distributed in California to be applied to soil, plants, or seeds for soil corrective purposes; or that is intended to improve germination, growth, yield, product quality, reproduction, flavor, or other desirable characteristics of plants; or that is intended to produce any chemical, biochemical, biological, or physical change in soil. The term includes:

   1. Bacterial inoculants;

   2. Biotics;

   3. Lignin or humus preparations;

   4. Microbial products, including genetically engineered microorganisms;

   5. Soil binding agents;

   6. Synthetic polyelectrolytes;

   7. Wetting agents to promote water penetration; and,

   8. Any similar product intended to be used for influencing soils, plant growth, or crop or plant quality.

6. The 2009 legislation: On October 11, 2009, the Governor signed AB 856 (Caballero), Chapter 257, Statutes of 2009. Among other things, AB 856 amended the definition of "fertilizing material" contained in FAC Section 14533 to include organic input material. AB 856 also added FAC Section 14550.5 to provide the following definition for "organic input material":

[A]ny bulk or packaged commercial fertilizer, agricultural mineral, auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that is to be used in organic crop and food production and that complies with the requirements of the National Organic Program standards, as specified in Part 205 (commencing with Section 205.1) of Subchapter M of Chapter I of Subtitle B of Title 7 of the Code of Federal Regulations.

The author's office notes that this change provided an opportunity for suppliers of compost or organic input materials to be certified to ensure the quality and integrity of their products.

7. What would this bill do? This bill would define "organic input material", eligible for the SUT exemption, as auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that complies with the requirements of the National Organic Program standards, as specified in the Code of Federal Regulations.
   
   

   1. Auxiliary soil and plant substances: Currently, auxiliary soil and plant substances (e.g., bacterial inoculants, lignin or humus preparations, etc.) are specifically excluded by regulation from the definition of exempt fertilizers. Thus, if this bill were enacted, it appears that the taxation of auxiliary soil and plant substances would depend on whether the materials comply with the requirements of the National Organic Program standards, with organic materials generally qualifying for the SUT exemption and non-organic materials not qualifying.
      
      

   2. Specialty fertilizer: The BOE notes that currently "specialty fertilizers that are organic input materials are exempt from the sales and use tax." Thus, it does not appear that this bill would result in any change to the current taxation of specialty fertilizers.
      
      

   3. Soil amendments: Currently, BOE SUT Regulation 1588 specifically excludes "packaged soil amendments" from the definition of exempt "fertilizer". This term includes things like hay, straw, and peat moss. This bill, in turn, includes soil amendments within the definition of "organic input materials". Thus, if this bill were enacted, it appears that the taxation of soil amendments would depend on whether the soil amendments are organic (in which case they would qualify for the SUT exemption) or non-organic (in which case they would be taxable).
      
      

8. Absence of a sunset date: In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of an appropriate sunset provision.

REGISTERED SUPPORT / OPPOSITION:

Support

California Compost Coalition (Sponsor)

Agromin

Association of Compost Producers

Atlas Refuel

California League of Conservation Voters

Californians Against Waste

Cedar Avenue Recycling and Transfer Station

City and County of San Francisco Department of the Environment

Community Alliance with Family Farmers

Marin Sanitary Service

Mt. Diablo Resource Recovery Park

Napa Recycling and Waste Services

Northern Recycling Compost

Quackenbush Mt. Resource Recovery & Compost

Recology

Sonoma Compost

StopWaste

Tracy Delta Solid Waste Management

Upper Valley Recycling Compost

West Marin Environmental Action Committee

Zanker Materials Recovery & Landfill

Z-Best Composting

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: May 11, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1247

Author:Irwin – As Amended Ver:March 24, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: organic input material

SUMMARY: Provides a sales and use tax (SUT) exemption for "organic input material" to be applied to land, the products of which are to be used as food for human consumption or are to be sold in the regular course of business. Specifically, this bill:

1. Defines "organic input material" as auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that complies with the requirements of the National Organic Program standards, as specified in the Code of Federal Regulations.

2. Provides that, notwithstanding existing law, the state shall not reimburse any local agency for SUT revenues lost as a result of this exemption.

3. 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 this bill's effective date.

EXISTING LAW:

1. Imposes a 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. Imposes a complimentary use tax on the storage, use, or other 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 generally be remitted to the State Board of Equalization (BOE).
   
   

3. Provides a SUT exemption for all of the following:
   
   

   1. Any form of animal life the products of which ordinarily constitute food for human consumption;
      
      

   2. Feed for any form of animal life the products of which ordinarily constitute food for human consumption or are to be sold in the regular course of business;
      
      

   3. Seeds and plants the products of which ordinarily constitute food for human consumption or are to be sold in the regular course of business;
      
      

   4. Fertilizer to be applied to land the products of which are to be used as food for human consumption or are to be sold in the regular course of business; and,
      
      

   5. Drugs or medicines, including oxygen, the primary purpose of which is the prevention or control of disease, that are administered to animal life the products of which ordinarily constitute food for human consumption.

FISCAL EFFECT: The BOE estimates that this bill will reduce state and local revenues by $1 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

The state has numerous goals promoting the creation and use of compost. Composting diverts organic waste from the landfill and has been identified as a cost effective method to reduce greenhouse gas emissions. Further, the application of compost in agriculture and landscaping has been shown to offer significant soil carbon sequestration and water quality benefits, provide erosion control, reduce the need for synthetic and fertilizers and pesticides, and conserve water and energy required for irrigation.

Though compost provides significant benefits to our economy and environment, it remains unclear in tax code and in its enforcement, as to which organic input materials are exempt from sales tax. AB 1247 seeks to clarify that all certified organic input material used for food production are exempt from sales tax.

2. This bill is sponsored by the California Compost Coalition, which notes the following:

AB 856 approved by the Legislature and signed by the Governor in 2009, revised the definition of fertilizer to include organic input materials in order for organic soil amendments to share the same tax relief as petroleum based fertilizers.

In the case of Agromin, its compost meets the definition of an organic input material under Section 14550.5 and thus qualifies as a fertilizing material. However, the SBE (State Board of Equalization) is requiring Agromin to register its primary product as a specialty fertilizer – rather than as compost – with the CDFA even though Agromin's compost is delivered to its commercial agricultural customers as an agricultural mineral and a fertilizing material identified as an organic input material. It is OMRI (Organic Material Review Institute) listed as a crop fertilizer and registered with CDFA as an Organic Input Material.

Despite AB 856 there continues to be inconsistent interpretations of what organic input material is exempt and what is not because the SBE uses definitions in the Tax Code and not the Food and Agriculture Code. We need statutory clarification that all OMRI certified organic input material will qualify for the same food tax sales [sic] exemption.

Consequently, Agromin has been directed to collect sales taxes and even refund back taxes. This is both grossly inequitable and directly contrary to the Administration's initiative to promote healthy soils.

3. The BOE notes the following in its staff analysis of this bill:

   1. Effect of the bill: "This bill exempts from sales and use tax the sales of certain organic input materials to be applied to land, provided the land is used to produce food products or products to be sold in the regular course of business. The bill defines 'organic input material' as auxiliary soil and plant substances, specialty fertilizers, and soil amendments that comply with the National Organic Program standards. Accordingly, based on BOE's Sales and Use Tax Regulation 1588, sales of non-organic auxiliary soil and plant substances and soil amendments would remain subject to tax."

   2. Identifying exempt organic input material products appears uncomplicated: "The CDFA's Organic Input Material Program registers and maintains a list of organic input materials on its website. The list includes the firm name and product, brand name, or trademark information."

   3. Sales and use tax exemption of fertilizer applies to organic and non-organic fertilizers: "As previously stated, Regulation 1588 defines the term 'fertilizer' to include commercial fertilizers, agricultural minerals, manure, and carbon dioxide. The terms commercial fertilizer and agricultural minerals are defined in the FAC and include both organic and non-organic substances. To qualify for the exemption, the fertilizer must be applied to land to produce food, feed for food animals (including pasture grasses), and products to be sold by the purchaser (e.g., flowers). Auxiliary soil and plant substances and soil amendments (organic and non-organic) are specifically excluded from the definition of fertilizer, and are thus subject to tax."

   4. Definition of "organic input material": "Organic input material" is defined in FAC Section 14550.5 [. . .]. The bill's definition of organic input material is similar to Section 14550.5, with the exception that it does not include the terms 'commercial fertilizer' or 'agricultural mineral' and does not require that the organic input material is to be used in organic crop and food production. According to the author's office, the bill's definition does not include these terms because they are already exempt under current law. Additionally, the proposed exemption is intended to apply to organic input material used in both organic and non-organic crop and food production. To avoid confusion, BOE staff recommends using [the] Section 14550.5 definition for organic input material, and including a provision to specify, notwithstanding Section 14550.5, organic input material may be used in non-organic farming. BOE staff will work with the author's office to address this concern."

4. 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, 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).
      
      

   2. 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. While this affords taxpayers greater financial predictability, 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 or cost, without a supermajority vote.

   3. An overview of the SUT Law: California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other 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 generally be remitted to the BOE.

The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In fiscal year (FY) 2014-15, SUT revenues are estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

4. What accounts for the state's reduced reliance on SUT revenues? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

5. The SUT exemption for fertilizer: As noted above, existing law provides a complete SUT exemption for "[f]ertilizer to be applied to land the products of which are to be used as food for human consumption or are to be sold in the regular course of business." (Revenue and Taxation Code Section 6358(d).) BOE SUT Regulation 1588, in turn, defines the term "fertilizer" to include "commercial fertilizers", "agricultural minerals", "manure", and carbon dioxide. Each of these terms is further defined as follows:

   1. "Commercial fertilizer": This term is defined by reference to Food and Agricultural Code (FAC) Section 14522 as any substance containing 5% or more of nitrogen (N), available phosphoric acid (P2O5), or soluble potash (K2O), singly or collectively, which is distributed in this state for promoting or stimulating plant growth. "Commercial fertilizer" includes both agricultural and specialty fertilizers. "Specialty fertilizers" may contain less than 5% nitrogen (N), available phosphoric acid (P2O5), or soluble potash (K2O), singly or collectively.

   2. "Agricultural minerals": This term is defined by reference to FAC Section 14512 as any substance with nitrogen (N), available phosphoric acid (P2O5), and soluble potash (K2O), singly or in combination, in amounts less than 5% which is distributed for farm use, or any substance only containing recognized essential secondary nutrients or micronutrients in amounts equal or greater than minimum amounts specified by regulation and distributed in this state as a source of these nutrients for the purpose of promoting plant growth. This term specifically includes gypsum, liming materials, manure, wood fly ash, sewage sludge not qualifying as commercial fertilizer, and captured dilute solutions.

   3. "Manure": This term is defined as the excreta of any domestic animal or domestic fowl which is not artificially mixed with any material except a material which has been used for bedding, sanitary, or feeding purposes for such an animal or fowl or for the preservation of the manure.

BOE SUT Regulation 1588 specifically excludes from the definition of "fertilizer" both "packaged soil amendments" and "auxiliary soil and plant substances" defined as follows:

1. "Packaged soil amendments": This term is generally defined by reference to FAC Section 14552 as any substance distributed for the purpose of promoting plant growth or improving the quality of crops by conditioning soils solely through physical means. The term includes:

   1. Hay;

   2. Straw;

   3. Peat moss;

   4. Leaf mold;

   5. Sand;

   6. Wood products;

   7. Any product or mixture of products intended for use as a potting medium, planting mix, or soilless growing media; and,

   8. Any other substance or product which is intended for use solely because of its physical properties.

2. "Auxiliary soil and plant substances": This term is generally defined by reference to FAC Section 14513 as any chemical or biological substance or mixture of substances or device distributed in California to be applied to soil, plants, or seeds for soil corrective purposes; or that is intended to improve germination, growth, yield, product quality, reproduction, flavor, or other desirable characteristics of plants; or that is intended to produce any chemical, biochemical, biological, or physical change in soil. The term includes:

   1. Bacterial inoculants;

   2. Biotics;

   3. Lignin or humus preparations;

   4. Microbial products, including genetically engineered microorganisms;

   5. Soil binding agents;

   6. Synthetic polyelectrolytes;

   7. Wetting agents to promote water penetration; and,

   8. Any similar product intended to be used for influencing soils, plant growth, or crop or plant quality.

6. The 2009 legislation: On October 11, 2009, the Governor signed AB 856 (Caballero), Chapter 257, Statutes of 2009. Among other things, AB 856 amended the definition of "fertilizing material" contained in FAC Section 14533 to include organic input material. AB 856 also added FAC Section 14550.5 to provide the following definition for "organic input material":

[A]ny bulk or packaged commercial fertilizer, agricultural mineral, auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that is to be used in organic crop and food production and that complies with the requirements of the National Organic Program standards, as specified in Part 205 (commencing with Section 205.1) of Subchapter M of Chapter I of Subtitle B of Title 7 of the Code of Federal Regulations.

The author's office notes that this change provided an opportunity for suppliers of compost or organic input materials to be certified to ensure the quality and integrity of their products.

7. What would this bill do? This bill would define "organic input material", eligible for the SUT exemption, as auxiliary soil and plant substance, specialty fertilizer, or soil amendment, excluding pesticides, that complies with the requirements of the National Organic Program standards, as specified in the Code of Federal Regulations.
   
   

   1. Auxiliary soil and plant substances: Currently, auxiliary soil and plant substances (e.g., bacterial inoculants, lignin or humus preparations, etc.) are specifically excluded by regulation from the definition of exempt fertilizers. Thus, if this bill were enacted, it appears that the taxation of auxiliary soil and plant substances would depend on whether the materials comply with the requirements of the National Organic Program standards, with organic materials generally qualifying for the SUT exemption and non-organic materials not qualifying.
      
      

   2. Specialty fertilizer: The BOE notes that currently "specialty fertilizers that are organic input materials are exempt from the sales and use tax." Thus, it does not appear that this bill would result in any change to the current taxation of specialty fertilizers.
      
      

   3. Soil amendments: Currently, BOE SUT Regulation 1588 specifically excludes "packaged soil amendments" from the definition of exempt "fertilizer". This term includes things like hay, straw, and peat moss. This bill, in turn, includes soil amendments within the definition of "organic input materials". Thus, if this bill were enacted, it appears that the taxation of soil amendments would depend on whether the soil amendments are organic (in which case they would qualify for the SUT exemption) or non-organic (in which case they would be taxable).
      
      

8. Absence of a sunset date: In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of an appropriate sunset provision.

REGISTERED SUPPORT / OPPOSITION:

Support

California Compost Coalition (Sponsor)

Agromin

Association of Compost Producers

Atlas Refuel

California League of Conservation Voters

Californians Against Waste

Cedar Avenue Recycling and Transfer Station

City and County of San Francisco Department of the Environment

Community Alliance with Family Farmers

Marin Sanitary Service

Mt. Diablo Resource Recovery Park

Napa Recycling and Waste Services

Northern Recycling Compost

Quackenbush Mt. Resource Recovery & Compost

Recology

Sonoma Compost

StopWaste

Tracy Delta Solid Waste Management

Upper Valley Recycling Compost

West Marin Environmental Action Committee

Zanker Materials Recovery & Landfill

Z-Best Composting

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098