The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for any lease or transfer of title of tangible personal property constituting a project to any participating party, and defines a project and participating party for those purposes. The act limits the sales and use tax exclusion to $100,000,000 for each calendar year.

This bill would extend expand those persons eligible for the sales and use tax exclusion exclusion, which is limited in amount, to additionally include any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project. This bill would also provide for an additional sales and use tax exclusion amount of $475,000,000 for the 2016 calendar year and $250,000,000 for each calendar year thereafter, plus allow the exclusion amount granted by the authority in any year to include any amounts not granted or amounts granted but unused from the previous calendar year beginning in the 2017 calendar year.

This bill would take effect immediately as a tax levy.

The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for any lease or transfer of title of tangible personal property constituting a project to any participating party, and defines a project and participating party for those purposes. The act limits the sales and use tax exclusion to $100,000,000 for each calendar year.

This bill would extend the sales and use tax exclusion to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project. This bill would provide for an additional sales and use tax exclusion amount of $475,000,000 for the 2016 calendar year and $250,000,000 for each calendar year thereafter, plus any amounts not granted or amounts granted but unused from the previous calendar year beginning in the 2017 calendar year.

This bill would take effect immediately as a tax levy.

The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for any lease or transfer of title of tangible personal property constituting a project to any participating party, and defines a project and participating party for those purposes. The act limits the sales and use tax exclusion to $100,000,000 for each calendar year.

This bill would extend the sales and use tax exclusion to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project. This bill would provide for an additional sales and use tax exclusion amount of $475,000,000 for the 2016 calendar year and $250,000,000 for each calendar year thereafter, plus any amounts not granted or amounts granted but unused from the previous calendar year beginning in the 2017 calendar year.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 2334 (Mullin) - Sales and use taxes: exclusion: alternative energy financing

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2334 would allow the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) to carry forward to future years unallocated sales and use tax exemptions from previous years.

Fiscal Impact:

• The Board of Equalization would incur minor and absorbable expenses to notify taxpayers, modify its internet site and publications, and answer inquiries.
• Unknown use of the SUT exclusion as a result of rolling forward unallocated exclusion amounts for an additional year. The magnitude is unknown, but potential in the low hundreds of millions of dollars.
• CAEATFA would require one position and incur additional ongoing costs of $132,000 (special fund) related to additional application activity.

Background:

Except where a specific exemption or exclusion is provided, current law imposes the SUT on all retailers for the privilege of selling tangible personal property (TPP) at retail in California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer.

After the State collects SUT revenue ($48 billion in 2013-14), it allocates the money to various state and local funds. Roughly half—collected from an approximately 3.9 percent rate—goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs—an approximately 1.1 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates—known as Transactions and Use Taxes (TUTs)—and a small portion of these funds are used for general purposes. As of January 1, 2017, the average statewide SUT rate will be 8.21 percent.

State law fully exempts many items from SUT (such as prescription drugs, food, electricity, and poultry litter), while other items are exempted from the state sales tax, but not the local share, such as farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, timber harvesting equipment and machinery, and racehorse breeding stock. Partial SUT exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently, resulting in additional return processing workload for BOE.

Additionally, when construction contractors purchase products to improve real property, state law generally considers them as the consumer of materials, such as electrical wiring, concrete, and other items, for sales tax purposes. As such, the contractor pays tax on materials they use in the project, and incorporate the tax into the contracted price. However, state law treats construction contractors as a retailer for fixtures, which are accessories to a structure that do not lose their identity when installer, so the contractor must collect and remit the sales tax based on the price he or she charges for the fixture.

Economic Development Initiative. In 2013, the Legislature enacted AB 93 (Committee on Budget) and SB 90 (Committee on Budget and Fiscal Review), also known as the “Economic Development Initiative,” which reformed California’s economic development policies by eliminating enterprise zones and other geographically-targeted economic development areas, and instead allowed three new tax benefits:

• Tax credits for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment. The credit lasts from the 2014 taxable year until the 2019 taxable year.
• The California Competes Tax Credit, where the California Competes Tax Credit Committee, also created by the bill, can award various tax credits up to an annually capped amount to taxpayers who apply. The Committee is comprised of the Treasurer, the Director of Finance, the Director of the Governor’s Office of Business and Economic Development (GO-BIZ), one appointee of the Speaker of the Assembly, and one appointee from the Senate Committee on Rules.
• A state-only (3.9375 percent) SUT exemption on purchases of manufacturing equipment made by taxpayers within specific North American Industrial Classification System codes, capped at $200 million annually per taxpayer, effective July 1, 2014, and ending July 1, 2022. The exemption largely superseded existing programs, as they applied to almost all the same taxpayers. Instead of applying to CAEATFA, taxpayers simply print a resale certificate from BOE’s website, and present it to the retailer to purchase the property sales-tax free.

CAEATFA provides financial assistance through conduit revenue bonds, loan guarantees, loan loss reserves and a sales and use tax exemption for facilities that use alternative energy sources and technologies or engage in advanced manufacturing. CAEATFA’s board decides which projects to assist. In addition to its SUT program, CAEATFA administers other programs, including:

• A $10 million loan loss reserve program that directs the state to reimburse the original mortgage lender for the costs associated with the Property Assessed Clean Energy program assessments during a foreclosure (SB 96, Committee on Budget and Fiscal Review, 2013).
• A $25 million loan loss reserve program to backstop loans made by participating financial institutions for energy efficiency improvements and distributed generation technology (ABx1 14, Skinner, 2011).

When the Legislature created CAEATFA in 1980, it provided that both the state and local shares of the sales and use tax didn’t apply to its purchases of tangible personal property. However, CAEATFA didn’t do much until 2008, when Governor Arnold Schwarzenegger and State Treasurer Bill Lockyer announced that CAEATFA would use this authority to grant a state and local sales and use tax exclusion for normally taxable manufacturing equipment purchased by Tesla Motors under a sale-leaseback agreement. Subsequently, the Legislature directed CAEATFA to administer a state and local sales and use tax exclusions for manufacturers of renewable technology, subject to an application and evaluation process (SB 71, Padilla, 2010), which was soon after expanded to advanced manufacturing (SB 1128, Padilla, 2012). While CAEATFA’s blanket sales and use tax exemption authority doesn’t have a sunset, the Legislature placed a July 1, 2021, sunset on the renewable energy production program, and last year, extended to the same date the prior July 1, 2016, sunset on the advanced manufacturing program (AB 1269, Dababneh, 2015). The Legislature also expanded the program last year to include projects that utilize recycled feedstock either for reuse or in producing another product or soil amendment (AB 199, Eggman).

CAEATFA can allocate exclusions up to $100 million annually to successful applicants across all programs; however, CAEATFA evaluates all applicants to determine whether the benefits received by the state will outweigh forgone revenue, and can only approve applications for projects that produce net fiscal and environmental benefits for the state. Once the exclusion has been granted, applicants are allowed three years to use the award, but can request extensions. CAEATFA can neither recapture for future allocation any amounts awarded in previous years but not yet utilized, nor carry forward unallocated authorizations from previous years, unlike other authorities in the Treasurer’s Office. CAEATFA had approved more than $400 million in exclusions; however they could’ve allocated $211 more if authorized to carry forward amounts from previous years.

In December, 2015, CAEATFA suspended acceptance of new applications due to oversubscription, and to develop of the regulations to implement AB 199. Tesla applied for two projects for a total of $145 million, along with two other large applicants: Atieva ($44 million), and Gilead Sciences, Inc. ($15.8 million). Seeking authorization to be able to grant additional exclusions to applicants using previously allocated but unclaimed tax benefits, CAEATFA wants to modify the current $100 million cap. CAEATFA also wants to include sales tax imposed as part of any construction contracts with approved applicants as part of the exclusion.

Proposed Law:

This bill would provide that CAEATFA can allocate any amounts not granted, or granted and not used, from the previous calendar year, beginning in the 2017 calendar year. The measure also would expand CAEATFA’s SUT exclusion to include any lease or transfer of title of tangible personal property constituting any project to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project.

Related Legislation:

AB 1683 (Eggman) allows the unallocated portion of the current $100 million cap in one calendar year to be added to the following calendar year’s cap. The bill was held under submission on the Suspense File of the the Assembly Appropriations Committee.

Staff Comments: Between November 2010 and January 1, 2016, CAEATFA approved tax exclusions of about $455 million, but only $92 million in tax has been claimed.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Sales and use taxes: exclusion: alternative energy financing

Allows CAEATFA to carry forward to future years unallocated sales and use tax exemptions from previous years, commencing in the 2017 calendar year.

Background

State law imposes the sales tax on every retailer engaged in business in this state that sells tangible personal property, and requires them to collect the appropriate tax from the purchase and remit the amount to the Board of Equalization (BOE). Sales tax applies whenever a retail sale is made, which is basically any sale other than one for resale in the regular course of business. Unless the person pays the sales tax to the retailer, he or she is liable for the use tax, which is imposed on any person consuming tangible personal property in the state. The use tax rate is the same rate as the sales tax rate, and must be remitted on or before the last day of the month following the quarterly period in which the person made the purchase. The current rate is 7.50%, but beginning January 1, 2017, the sales and use tax rate decreases to 7.25% (Proposition 30, 2012. The rate breakdown is detailed below). Additionally, cities and counties may increase the sales and use tax rate up to 2% for either specific or general purposes pursuant to the California Constitution’s vote requirements.

Many items are fully exempted from the sales and use tax in this state (prescription drugs, food, poultry litter), while others are exempted from the state sales tax, but not the local share, such as farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, timber harvesting equipment and machinery, and racehorse breeding stock.

Additionally, when construction contractors purchase products to improve real property, state law generally considers them as the consumer of materials, such as electrical wiring, concrete, and other items, for sales tax purposes. As such, the contractor pays tax on materials they use in the project, and incorporate the tax into the contracted price. However, state law treats construction contractors as a retailer for fixtures, which are accessories to a structure that do not lose their identity when installer, so the contractor must collect and remit the sales tax based on the price he or she charges for the fixture.

Economic Development Initiative. In 2013, the Legislature enacted AB 93 (Committee on Budget) and SB 90 (Committee on Budget and Fiscal Review), also known as the “Economic Development Initiative,” which reformed California’s economic development policies by eliminating enterprise zones and other geographically-targeted economic development areas, and instead allowed three new tax benefits:

• Tax credits for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment. The credit lasts from the 2014 taxable year until the 2019 taxable year.
• The California Competes Tax Credit, where the California Competes Tax Credit Committee, also created by the bill, can award various tax credits up to an annually capped amount to taxpayers who apply. The Committee is comprised of the Treasurer, the Director of Finance, the Director of the Governor’s Office of Business and Economic Development (GO-BIZ), one appointee of the Speaker of the Assembly, and one appointee from the Senate Committee on Rules.
• A state-only (3.9375%) sales and use tax exemption on purchases of manufacturing equipment made by taxpayers within specific North American Industrial Classification System codes, capped at $200 million annually per taxpayer, effective July 1, 2014, and ending July 1, 2022. The exemption largely superseded the SB 71 and SB 1128 programs, as they applied to almost all the same taxpayers. Instead of applying to CAEATFA, taxpayers simply print a resale certificate from BOE’s website, and present it to the retailer to purchase the property sales-tax free.

CAEATFA. Housed in the office of the State Treasurer, the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) provides financial assistance through conduit revenue bonds, loan guarantees, loan loss reserves and a sales and use tax exemption for facilities that use alternative energy sources and technologies or engage in advanced manufacturing. CAEATFA’s board, composed of the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission, decides which projects to assist. In addition to its sales and use tax program, CAEATFA administers other programs, including:

• A $10 million loan loss reserve program that directs the state to reimburse the original mortgage lender for the costs associated with the Property Assessed Clean Energy program assessments during a foreclosure (SB 96, Committee on Budget and Fiscal Review, 2013).
• A $25 million loan loss reserve program to backstop loans made by participating financial institutions for energy efficiency improvements and distributed generation technology (ABx1 14, Skinner, 2011).

When the Legislature created CAEATFA in 1980, it provided that both the state and local shares of the sales and use tax didn’t apply to its purchases of tangible personal property. However, CAEATFA didn’t do much until 2008, when Governor Arnold Schwarzenegger and State Treasurer Bill Lockyer announced that CAEATFA would use this authority to grant a state and local sales and use tax exclusion for normally taxable manufacturing equipment purchased by Tesla Motors under a sale-leaseback agreement. Subsequently, the Legislature directed CAEATFA to administer a state and local sales and use tax exclusions for manufacturers of renewable technology, subject to an application and evaluation process (SB 71, Padilla, 2010), which was soon after expanded to advanced manufacturing (SB 1128, Padilla, 2012). While CAEATFA’s blanket sales and use tax exemption authority doesn’t have a sunset, the Legislature placed a July 1, 2021, sunset on the renewable energy production program, and last year, extended to the same date the prior July 1, 2016, sunset on the advanced manufacturing program (AB 1269, Dababneh, 2015). The Legislature also expanded the program last year to include projects that utilize recycled feedstock either for reuse or in producing another product or soil amendment (AB 199, Eggman).

CAEATFA can allocate exclusions up to $100 million annually to successful applicants across all programs; however, CAEATFA evaluates all applicants to determine whether the benefits received by the state will outweigh forgone revenue, and can only approve applications for projects that produce net fiscal and environmental benefits for the state. Once the exclusion has been granted, applicants are allowed three years to use the award, but can request extensions. CAEATFA can neither recapture for future allocation any amounts awarded in previous years but not yet utilized, nor carry forward unallocated authorizations from previous years, unlike other authorities in the Treasurer’s Office. CAEATFA had approved more than $400 million in exclusions; however they could’ve allocated $211 more if authorized to carry forward amounts from previous years.

In December, 2015, CAEATFA suspended acceptance of new applications due to oversubscription, and to develop of the regulations to implement AB 199. Tesla applied for two projects for a total of $145 million, along with two other large applicants: Atieva ($44 million), and Gilead Sciences, Inc. ($15.8 million). Seeking authorization to be able to grant additional exclusions to applicants using previously allocated but unclaimed tax benefits, CAEATFA wants to modify the current $100 million cap. CAEATFA also wants to include sales tax imposed as part of any construction contracts with approved applicants as part of the exclusion.

Proposed Law

Assembly Bill 2334 provides that CAEATFA can allocate any amounts not granted, or granted and not used, from the previous calendar year, beginning in the 2017 calendar year. The measure also expands CAEATFA’s sales and use tax exclusion to include any lease or transfer of title of tangible personal property constituting any project to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project.

State Revenue Impact

According to BOE, AB 2334 has an unknown impact on state revenues.

Comments

1. Purpose of the bill. According to the author, “AB 2334 allows for rollover of unused funds from previous years of the California Alternative Energy and Advanced Transportation Authority (CAEATFA) sales and use tax exclusion (STE), currently capped at $100 million. Furthermore, AB 2334 streamlines the process by allowing contractors designated by the participating party to claim the STE. In doing so, AB 2334 gives CAEATFA the ability to further incentivize California-based jobs and manufacturing, while promoting clean technology and reducing pollution and energy consumption.”

2. Priorities. Interest in CAEATFA’s sales and use tax exclusion is highly cyclical, depending on the general business cycle, as well as specific interest from the types of firms that qualify for CAEATFA’s renewable energy technology and advanced manufacturing programs. As a result, CAEATFA’s tax exemption programs were undersubscribed from 2010 to 2014, but in 2015, CAEATFA received applications for exemptions in amounts which exceeded the authorized $100 million. To respond to higher demand, AB 2334 as introduced would have increased the annual cap to $475 million in 2016, and $250 million from 2017 to 2020, while also authorizing future awards of amounts previously unallocated. However, recent amendments deleted the increase in the cap, and only allow CAEATFA to award unallocated exclusions from the prior year starting in 2017, which likely will be zero because of the current oversubscription. While any unallocated exclusions likely result in less fiscal losses, CAEATFA can only approve applications for which it finds that the net environmental and economic benefits. The Committee may wish to consider its desired level of authority for CAEATFA’s tax programs, and whether it should be allowed to allocate amounts today that weren’t claimed in the past.

3. Review. In its December, 2014, report to the Legislature regarding both the SB 71 and 1128 programs, CAEATFA states that up to that time, it had approved 76 projects for a total of $273 million of foregone revenue; however, only 63 applicants eventually purchased $43.3 million of equipment because applicants build out projects over a course of years, and the revenue effect doesn’t occur until the applicant purchases the property. CAEATFA adds that most of the unspent allocation comes from a few, larger, more recent applicants, with only two comprising one-third of the unspent amount. Smaller projects of less than $1 million constitute the majority of granted applications and foregone revenue. CAEATFA projected net environmental benefits of $82 million, economic benefits of $299 million, with a fiscal cost of $244 million, for a total net benefit of $137 million realized over the expected useful life of the equipment, which is about 5 to 29 years. As part of the report, CAEATFA recommends extending the advanced manufacturing program to provide businesses with stability and a sufficient planning horizon, which the Legislature did last year. CAEATFA also recommended removing the $100 million cap on the combined program as a signal to green businesses and investors that the exemption would be available for large projects choosing to locate in California. Additionally, CAEATFA must report on the sales and use tax exemption program by January 1, 2017, including the number of jobs created, the costs of each job, as well as its annual salary, and consider a dynamic analysis of the economic output of the state without the exemption by January 1, 2017.

4. Hard times. Much of CAEATFA’s operating budget comes from a loan from the Renewable Resource Trust Fund, which it repays from application fees. In the past, CAEATFA stated that it had “erratic application volume and program activity” due to the economic recession, localized industry trends such as the disruption of the solar manufacturing market, and the enactment of the general sales and use tax exclusion. CAETFA’s fee schedule imposes a fee of .0005 of the total amount of anticipated qualified machinery in the application, not to exceed $10,000 per applicant, and .004 of the machinery purchases, not to exceed $350,000. As application volume picks up, CAEATFA is more likely to be able to repay its loan, even more so if it could award previously unallocated amounts.

5. Construction. Current law only exempts transfers of title of property to the successful applicant for the CAEATFA exclusion, so only the applicant may issue a certificate to the retailers, but not its construction contractors and subcontractors performing the work on the eligible project. While parties can structure contracts to allow contractors to apply the exemption in certain circumstances, CAEATFA argues that doing so is unnecessarily complicated and cumbersome. To simplify the process, this bill proposes to allow any contractor to claim the exemption when the contractor purchases property for use in the performance of a construction contract for the participating party; however, this treatment only applies if the participating party will use the property as an integral part of the approved project.

Assembly Actions

Assembly Revenue and Taxation 9-0
Assembly Appropriations 20-0
Assembly Floor 78-0

Support and Opposition

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Support: State Treasurer John Chiang, Californians Against Waste, California Manufacturers and Technology Association, Proterra, Silicon Valley Leadership Group, TechNet.

Opposition: None received.

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ASSEMBLY THIRD READING

ATR Bill Id:

Author:(Mullin and Ting)

As Amended Ver:May 27, 2016

2/3 vote. Tax levy

SUMMARY: Modifies the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Act and extends the sales and use tax (SUT) exclusion to purchases of tangible personal property (TPP) by certain contractors, as provided. Specifically, this bill:

1. Extends the SUT exclusion to a lease or transfer of title of eligible TPP to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project (a "construction contract").
2. Authorizes CAEATFA, for the 2017 calendar year and each calendar year thereafter, to allocate previously unused or unallocated amounts of the SUT exclusion from the calendar year immediately preceding the year of allocation.
3. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, process recycled feedstock, or develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
2. Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used to process recycled feedstock or used for the "design, manufacture, production, or assembly" of advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined.
3. Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion.
4. Requires CAEATFA to provide 20-day notice to the Legislature, once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals.
5. Repeals the CAEATFA's expanded authority to promote the use of advanced manufacturing and recycled feedstock as of January 1, 2021.
6. Imposes a sales tax on a retailer's gross receipts from the retail sale of TPP in this state, unless the sale is specifically exempt from taxation. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption.

FISCAL EFFECT: According to the Assembly Appropriations Committee, unknown state and local revenue loss as a result of additional exclusions being used.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

AB 2334 increases the annual award cap of the California Alternative Energy and Advanced Transportation Authority (CAEATFA) sales and use tax exclusion (STE) from $100 million to $350 million and allows for rollover of unused funds from previous years, in addition to other small program changes. In doing so, AB 2334 gives CAEATFA the ability to further incentivize California-based jobs and manufacturing, while promoting clean technology and reducing pollution and energy consumption.

1. CAEATFA's SUT Exclusion Program. CAEATFA is allowed to provide an SUT exclusion for certain specified projects. The first SUT exclusion was granted to Tesla in 2009. Shortly thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for the design, manufacture, production, or assembly of "advanced transportation technologies" and "alternative source" products, components, or systems. Alternative source products include cogeneration technology; energy conservation; and solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced manufacturing" to the list of eligible projects. Consequently, the SUT exclusion program was enlarged to include "advanced manufacturing" projects. SB 1128 also placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year.

In 2013, AB 1422 (Jobs, Economic Development and the Economy Committee), Chapter 540, Statutes of 2013, revised the definition of "participating party" for purposes of the SUT exclusion to include out-of-state and overseas entities. AB 1422 allowed an otherwise qualified out-of-state entity to apply for financial assistance and the SUT exclusion. The entity, however, must commit and demonstrate that it will be opening a manufacturing facility in California.

Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.

1. CAEATFA's Application Process for SUT Exclusion. The CAEATFA has established a lengthy application process to ensure the efficient use of state resources by requiring each applicant to demonstrate a benefit to the state before an award may be granted. Before an SUT exclusion may be awarded, CAEATFA is required to determine the eligibility of an individual project based on a number of factors relating to the reduction in greenhouse gases and the creation of manufacturing jobs. Specifically, when evaluating an application, CAEATFA must consider the extent to which the project develops manufacturing facilities located in California; the extent to which the project will create new, permanent jobs in California; the extent to which the project results in a reduction of greenhouse gases; the unemployment rate in the area in which the project will be located; and any other factors that CAEATFA deems appropriate in accordance with this program, among other criteria. Most important among the factors is the requirement that applicants demonstrate a "net benefit" to the state. Known as the "net benefits" test, this test quantifies the fiscal and environmental benefits of the proposed project to ensure that the state receives a benefit beyond the cost of the SUT exclusion and is one of the most important factors that CAEATFA considers when awarding the exclusion. In this manner, the test attempts to address the "dead-weight" problem found within every subsidy. Projects approved for the exclusion receive a full exemption from the state and local portions of the SUT. The full SUT rate ranges from 7.5% to 10%, with a statewide average of 8.42%.

Once the exclusion has been granted, applicants are allowed three years to use the award but can request extensions from the CAEATFA Board. Amounts awarded in previous years, but not yet utilized, may not be recaptured by the CAEATFA. In November 2015, CAEATFA suspended acceptance of new applications due to the proposed program revisions and the development of the regulations to implement AB 199. Currently, $25 million of the 2016 annual amount remains unallocated.

1. Oversubscription: What is the Problem? Existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Thus, applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects. Furthermore, the CAEAFTA does not have the authority to utilize the unclaimed awards. Finally, CAEAFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts simply disappear.
2. What Does this Bill Do? This bill proposes to modify the existing CAEFTA program to: a) allow a rollover of unallocated funds to the following calendar year, beginning with the 2017 calendar year, and b) extend the SUT exclusion to a project where a contractor leases or purchases TPP for use in the performance of a construction contract for the participating party, as provided.
3. Construction Contracts: Definition of "Sale" or "Purchase." In 2012, SB 1128 revised Revenue and Taxation Code Section 6010.8, which authorizes the SUT exclusion to allow a "participating party" to purchase or lease qualified TPP directly from the seller, removing the need for CAEATFA to act as an intermediary. The term "participating party" means, among others, a person, federal or state agency, city or county, state college or university, school district or other political entity engaged in the business or operations in the state, whether for profit or non-profit, that applies for financial assistance from the CAEATFA for the purpose of implementing a project.

Prior to 2013, in order to qualify for the exemption, the participating party had to purchase the property without payment of tax and then resell the equipment to CAEATFA. The transfer was excluded from the SUT as a transfer from a participating party to CAEATFA. The participating party and CAEATFA would then enter into a lease agreement and upon complete installation of the TPP, ownership of that property would be transferred from the CAEATFA to the participating party. Alternatively, CAEATFA was able to purchase the specified equipment on behalf of the participating party, financing the purchase through a bond or loan, and the participating party would lease the equipment from CAEATFA. As the purchaser of the equipment, the CAEATFA paid no sales tax on the purchase, nor was it required to collect the use tax on the lease receipts. SB 1128 simplified these complicated sale-lease transactions that are not feasible for business reasons by providing that a lease or transfer of TPP constituting a "project" under the SB 71 Program to a participating party is neither a "sale" nor "use" and, thus, is exempt from the SUT.

This bill proposes to simplify sale-lease transactions further for certain construction contracts. According to CAEFTA, the main purpose of this modification is to streamline the application of the SUT exclusion for contractors and subcontractors. Existing law only covers transfers of title of TPP property to the participating party, not a contractor or subcontractor performing the work on the eligible project. Thus, only the participating party may issue a certificate to the retailers for the purchases of materials, fixtures, machinery, equipment or other TPP. Although a contractor may be able to utilize the SUT exclusion in certain circumstances, the process to ensure that the contractor is eligible to claim the exclusion when purchasing TPP is complicated and cumbersome. Construction contractors and participating parties must follow specific procedures when providing exemption certificates to suppliers and preparing contractual agreements. Essentially, a construction contract must be structured in a way, per BOE's instructions, that allows the title to materials to be transferred from the vendor selling TPP directly to the participating party. In some instances, a contractor may not be able to use the SUT exclusion because the participating party has become eligible for the exclusion after a contract was performed.

Usually, CAEATFA directs applicants to the BOE for advice regarding the use of contractors since the BOE is responsible for administering the SUT law. To simplify the process, this bill proposes to amend the existing definition of "sale" and "purchase" in Section 6010.8 to allow any contractor to claim the SUT exclusion when the contractor purchases TPP for use in the performance of a construction contract for the participating party. This provision would only apply if the participating party will use the TPP as an integral part of the approved project.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0003361

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2334

Author:(Mullin) – As Amended Ver:May 16, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This modifies the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Act to increase the annual amount of the sales and use tax (SUT) exclusion available for allocation by the CAEATFA and to extend the SUT exclusion to purchases of tangible personal property (TPP) by certain contractors, as provided. Specifically, this bill:

1. Extends the SUT exclusion to a lease or transfer of title of eligible TPP to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project (a "construction contract").
2. Increases the annual amount of SUT exclusions available for allocation to projects, including projects that involve specified construction contracts, as follows:
   1. For the 2016 calendar year, from $100 million to $575 million, plus any amounts not granted or used from the prior year.
   2. For calendar years 2017 through 2021, from $100 million to $350 million, plus any amounts not granted or used from the prior year.

FISCAL EFFECT:

Annual state and local revenue loss of up to $475 million in 2016 and $250 million annually thereafter. This bill expands the total allowable sales and use tax exclusion, but this not necessarily guarantee that the annual allocation will be used every year. Between November 2010 and January 1, 2016, the program approved $455 million in tax exclusions, but only $92 million was actually used, in part because some approved projects never get off the ground. However, the increasing popularity of the program, combined with this bill’s provision that unused dollars can be rolled forward into the current year, means more of the allocated credits in any given year are more likely to be used.

COMMENTS:

1. Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA).

CAEATFA is also allowed to provide a SUT exclusion for certain specified projects, and this program has been expanded in recent years. The first SUT exclusion was granted to Tesla in 2009. SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for "advanced transportation technologies" and "alternative source" products, components, or systems. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced manufacturing" to the list of eligible projects and placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year. In 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.

1. Program oversubscription. Last year, CAEATFA had a high number of applications requesting an allocation of the SUT exclusion, and the existing cap of $100 million was quickly reached. With the expansion of the CAEATFA program to include projects that process or utilize recycled feedstock, the number of SUT exclusion applications is expected to increase even more.
   
   While historically small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications, in recent years CAEAFTA has approved a number of applications for large projects with more than $20 million in SUT exclusions, such as for example, the ones submitted by Tesla, Atieva, Lockheed, Space X, and Solyndra.
   
   Existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Thus, applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects. Furthermore, the CAEAFTA does not have the authority to utilize the unclaimed awards. Finally, CAEAFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts disappear.
2. Related legislation. AB 1683 (Eggman), also on today’s agenda, adds two state legislators as ex officio members to CAEATFA and allows unused or unallocated amounts of the SUT exclusion to be carried forward one additional year.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 9, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2334 (

Author:Mullin) – As Introduced Ver:February 18, 2016

SUSPENSE

Majority vote. Fiscal committee. Tax levy.

SUBJECT: Alternative energy financing

SUMMARY: Modifies the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Act to increase the annual amount of the sales and use tax (SUT) exclusion available for allocation by the CAEATFA and to extend the SUT exclusion to purchases of tangible personal property (TPP) by certain contractors, as provided. Specifically, this bill:

1. Extends the SUT exclusion to a lease or transfer of title of eligible TPP to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project (a "construction contract").
2. Increases the annual amount of SUT exclusions available for allocation to projects, including projects that involve specified construction contracts, as follows:
   1. For the 2016 calendar year, from $100 million to $575 million.
   2. For the 2017 calendar year and each calendar year thereafter, from $100 million to $350 million, plus any amounts unused or not granted from the previous calendar year.
3. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, process recycled feedstock, or develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
   
2. Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used to process recycled feedstock or used for the "design, manufacture, production, or assembly" of advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined.
   
3. Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion.
   
4. Requires CAEATFA to provide 20-day notice to the Legislature, once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals.
   
5. Repeals the CAEATFA's expanded authority to promote the use of advanced manufacturing and recycled feedstock as of January 1, 2021.
6. Imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property (TPP) in this state, unless the sale is specifically exempt from taxation. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption.

FISCAL EFFECT: Unknown

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:
   
   "AB 2334 increases the annual award cap of the California Alternative Energy and Advanced Transportation Authority (CAEATFA) sales and use tax exclusion (STE) from $100 million to $350 million and allows for rollover of unused funds from previous years, in addition to other small program changes. In doing so, AB 2334 gives CAEATFA the ability to further incentivize California-based jobs and manufacturing, while promoting clean technology and reducing pollution and energy consumption."
2. Arguments in Support. The sponsor of this bill states that, as of February 2016, the SUT exclusion program "reached its annual award cap and is currently oversubscribed. . . . Oversubscription is due to increasing application numbers and to the large scale of awards to electric vehicle and aerospace companies." The sponsor argues, "[w]ith the program's 2016 cap already oversubscribed, projects that would have significant economic and environmental benefits to the state will not receive an award."
   
3. CAEATFA Program: Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the "California Alternative Energy and Advanced Transportation Financing Authority" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources.
   
   The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. Generally, CAEATFA is authorized to provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees, and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects.
4. CAEATFA's SUT Exclusion Program. CAEATFA is also allowed to provide a SUT exclusion for certain specified projects. The first SUT exclusion was granted to Tesla in 2009. Shortly thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for the design, manufacture, production, or assembly of "advanced transportation technologies" and "alternative source" products, components, or systems. Alternative source products include cogeneration technology; energy conservation; and solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced manufacturing" to the list of eligible projects. Consequently, the SUT exclusion program was enlarged to include "advanced manufacturing" projects. SB 1128 also placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year.
   
   In 2013, AB 1422 (Jobs, Economic Development and the Economy), Chapter 540, Statutes of 2013, revised the definition of "participating party" for purposes of the SUT exclusion to include out-of-state and overseas entities. AB 1422 allowed an otherwise qualified out-of-state entity to apply for financial assistance and the SUT exclusion. The entity, however, must commit and demonstrate that it will be opening a manufacturing facility in California.
   

Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.

1. CAEATFA's Application Process for SUT Exclusion. California provides several tax incentives designed to encourage socially beneficial behavior, such as an increase in low-income housing, research and development activity, and overall economic activity. A major policy concern when enacting a tax incentive program is the possibility of rewarding behavior that would have occurred in the absence of the subsidy, known as "deadweight loss". The possibility of rewarding, instead of incentivizing, behavior has become an accepted reality for almost all tax incentive programs. The Legislature has attempted to address this problem by creating tax incentives programs that require potential beneficiaries to undergo a rigorous application process to ensure, on a case-by-case basis, that the state receives the desired benefit.
   
   One of the prime examples of such programs is the SUT exclusion administered by the CAEATFA. The CAEATFA has established a lengthy application process to ensure the efficient use of state resources by requiring each applicant to demonstrate a benefit to the state before an award may be granted. Before a SUT exclusion may be awarded, CAEATFA is required to determine the eligibility of an individual project based on a number of factors relating to the reduction in greenhouse gases and the creation of manufacturing jobs. Specifically, when evaluating an application, CAEATFA must consider the extent to which the project develops manufacturing facilities located in California; the extent to which the project will create new, permanent jobs in California; the extent to which the project results in a reduction of greenhouse gases; the unemployment rate in the area in which the project will be located; and any other factors that CAEATFA deems appropriate in accordance with this program, among other criteria. Most important among the factors is the requirement that applicants demonstrate a "net benefit" to the state. Known as the "net benefits" test, this test quantifies the fiscal and environmental benefits of the proposed project to ensure that the state receives a benefit beyond the cost of the SUT exclusion and is one of the most important factors that CAEATFA considers when awarding the exclusion. In this manner, the test attempts to address the "dead-weight" problem found within every subsidy. Projects approved for the exclusion receive a full exemption from the state and local portions of the SUT. The full SUT rate ranges from 7.5% to 10%, with a statewide average of 8.42%.

Once the exclusion has been granted, applicants are allowed three years to use the award but can request extensions from the CAEATFA Board. Amounts awarded in previous years, but not yet utilized, may not be recaptured by the CAEATFA. In November 2015, CAEATFA suspended acceptance of new applications due to the proposed program revisions and the development of the regulations to implement AB 199. Currently, $25 million of the 2016 annual amount remains unallocated.

1. What Does this Bill Do? This bill proposes to modify the existing CAEFTA program to: (a) increase the aggregate award amount available to eligible applicants in each calendar year, starting with 2017; (b) allow a rollover of unallocated funds to the following calendar year; and, (c) extend the SUT exclusion to a project where a contractor leases or purchases TPP for use in the performance of a construction contract for the participating party, as provided. With respect to the award amount, this bill would increase the cap from $100 million to $575 million (which includes unused funds from 2010-2014 calendar years) for the 2016 calendar year and to $350 million for the 2017 calendar year and each year thereafter. It appears that, of these amounts, at least $100 million plus any previously unallocated or unused amounts must be allocated each calendar year, beginning with the 2017 calendar year, exclusively to projects other than the specified construction contracts.
2. Oversubscription: What is the Problem? According to CAEATFA, a very diverse group of applicants are applying for the same funds. Last year, CAETFA had a high number of applications requesting an allocation of the SUT exclusion, and the existing cap of $100 million was quickly reached. With the expansion of the CAETFA program to include projects that process or utilize recycled feedstock, the number of SUT exclusion applications is expected to increase even more.
   
   During this Committee's informational hearing on February 22, 2016, the Executive Director of CAEFTA testified that the increased demand for the funds may be due to continued economic recovery, newly added categories of eligible projects and a number of applications requesting large SUT exclusion amounts. While historically small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications, in recent years CAEFTA has approved a number of applications for large projects with more than $20 million in SUT exclusions, such as for example, the ones submitted by Tesla, Atieva, Lockheed, Space X, and Solyndra.
   
   Existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Thus, applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects. Furthermore, the CAEFTA does not have the authority to utilize the unclaimed awards. Finally, CAEFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts simply disappear. The author believes that allowing a rollover of unallocated funds to the following calendar year and substantially increasing the annual SUT exclusion cap would help projects that would have significant economic and environmental benefits to the state.
3. Partial SUT Exemption for Purchases of Manufacturing and R&D Equipment. In 2013, Governor Brown signed AB 93 (Committee on Budget), Chapter 69, Statutes of 2013, which reformed California's economic development policies. The new law eliminated enterprise zones and other geographically targeted economic development areas and, instead, created three new tax benefits: (a) a temporary tax credit for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment; (b) a temporary SUT exemption on purchases of manufacturing equipment made by qualified taxpayers, capped at $200 million annually per taxpayer; and, (c) the California Competes Tax Credit program. Existing law limits the total annual amount of these three tax incentives to $750 million.
   
   With the passage of AB 93, sales and leases of certain manufacturing and R&D equipment may now qualify for the temporary SUT partial exemption. The partial exemption rate is currently set at 4.1875%, which means that sales of qualifying property sold to a qualified person are taxed at a rate of 3.3125% (7.5% current statewide tax rate minus 4.1875% partial exemption rate), plus any applicable district taxes. The exemption is available for purchases made until July 1, 2022. The program is generally self-certified, with little oversight from the State Board of Equalization (BOE). The program was created in such a way as to allow the partial SUT exemption to be taken immediately, without complicated forms and procedures.

Unlike CAEATFA's SUT exclusion, the partial SUT exemption does not necessarily attempt to encourage or incentivize beneficial behavior. Instead, the partial SUT exemption attempts to reduce the distortion from the imposition of a tax on a tax, otherwise known as "pyramiding". When manufacturers pay a SUT on tangible personal property, the tax is incorporated into the cost of a consumer product, often leading to double taxation. Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services provided by a single company instead of those that require multiple production steps.

1. The Interaction of the Partial SUT Exemption and the CAEFTA SUT Exclusion. To a large degree, the CAEATFA SUT program overlaps with the partial SUT exemption for manufacturing and R&D equipment. Thus, unless a project includes a purchase of manufacturing or R&D equipment worth more than $200 million, the purchase may qualify for the partial SUT exemption, which requires no application or allocation. However, as noted above, the partial SUT exemption provides tax relief only for the state portion of the SUT. When the partial SUT exemption was enacted, the BOE estimated that General Fund revenue would decrease annually by more than $600 million ($637 million in fiscal year (FY) 2014-15 and $681 million in FY 2015-16). However, the most recent data demonstrates that the exemption is currently underutilized. The total exemption amount claimed in FY 2014-15 was $91.2 million; in the first four months of FY 2015-16, the amount was only $77.2 million. The underutilization problem may be due to complexities of the program and/or may be attributed to the conditional nature of the SUT exemption, where only a certain type of property and purchasers qualify for the exemption. It may be argued that the partial nature of the exemption, where some amount of SUT still needs to be collected by the vendor, also contributes to the underutilization problem.

Meanwhile, the CAEATFA exclusion program has been oversubscribed. Although the program has no per-purchaser limit, it is subject to the overall annual cap of $100 million and most likely will be oversubscribed in 2016 and 2017. In the absence of legislative intent, it is unclear which types of projects should receive priority.

The CAEATFA program had been in place for many years prior to the enactment of the partial SUT exemption. It is unknown whether the underutilization of one program has contributed to the oversubscription for the other program or whether there is any connection between the two programs. However, in light of the underutilization of the partial SUT exemption and oversubscription of the CAEATFA program, the Committee may consider restructuring the CAEATFA program to prioritize certain projects, in addition to allowing the recapture of allocated funds and rollover of unallocated funds. Furthermore, as an alternative to the proposed increase in the $100 million cap, the Committee may also consider authorizing CAEATFA to exempt only the local portion of the SUT in the case of projects that otherwise meet the eligibility requirements for the partial SUT exemption.

1. Construction Contracts: Definition of "Sale" or "Purchase." In 2012, SB 1128 revised R&TC Section 6010.8, which authorizes the SUT exclusion to allow a "participating party" to purchase or lease qualified TPP directly from the seller, removing the need for CAEATFA to act as an intermediary. The term "participating party" means, among others, a person, federal or state agency, city or county, state college or university, school district or other political entity engaged in the business or operations in the state, whether for profit or non-profit, that applies for financial assistance from the CAEATFA for the purpose of implementing a project.
   
   Prior to 2013, in order to qualify for the exemption, the participating party had to purchase the property without payment of tax and then resell the equipment to CAEATFA. The transfer was excluded from the SUT as a transfer from a participating party to CAEATFA. The participating party and CAEATFA would then enter into a lease agreement and upon complete installation of the TPP, ownership of that property would be transferred from the CAEATFA to the participating party. Alternatively, CAEATFA was able to purchase the specified equipment on behalf of the participating party, financing the purchase through a bond or loan, and the participating party would lease the equipment from CAEATFA. As the purchaser of the equipment, the CAEATFA paid no sales tax on the purchase, nor was it required to collect the use tax on the lease receipts. SB 1128 simplified these complicated sale-lease transactions that are not feasible for business reasons by providing that a lease or transfer of TPP constituting a "project" under the SB 71 Program to a participating party is neither a "sale" nor "use" and, thus, is exempt from the SUT.
   

This bill proposes to simplify sale-lease transactions further for certain construction contracts. According to CAEFTA, the main purpose of this modification is to streamline the application of the SUT exclusion for contractors and subcontractors. Existing law only covers transfers of title of TPP property to the participating party, not a contractor or subcontractor performing the work on the eligible project. Thus, only the participating party may issue a certificate to the retailers for the purchases of materials, fixtures, machinery, equipment or other TPP. Although a contractor may be able to utilize the SUT exclusion in certain circumstances, the process to ensure that the contractor is eligible to claim the exclusion when purchasing TPP is complicated and cumbersome. Construction contractors and participating parties must follow specific procedures when providing exemption certificates to suppliers and preparing contractual agreements. Essentially, a construction contract must be structured in a way, per BOE's instructions, that allows the title to materials to be transferred from the vendor selling TPP directly to the participating party. In some instances, a contractor may not be able to use the SUT exclusion because the participating party has become eligible for the exclusion after a contract was performed.

Usually, CAEATFA directs applicants to the BOE for advice regarding the use of contractors since the BOE is responsible for administering the SUT law. To simplify the process, this bill proposes to amend the existing definition of "sale" and "purchase" in Section 6010.8 to allow any contractor to claim the SUT exclusion when the contractor purchases TPP for use in the performance of a construction contract for the participating party. This provision would only apply if the participating party will use the TPP as an integral part of the approved project.

It seems that while increasing the overall annual allocation amount for the SUT exclusion, this bill would require that at least $100 million be awarded annually to projects other than projects involving the abovementioned leases and purchases of TPP by contractors. Stated differently, this bill would create two categories of projects: projects that will become eligible for the SUT exclusion award only after the effective date of this bill and projects that are already eligible under existing law. Although unclear, it appears that the overall annual allocation amount will depend on the type of projects eligible for the awards.

1. Related Legislation. AB 1683 (Eggman) is similar to this bill. AB 1683, among other things, would increase the annual amount of SUT exclusions available for annual allocations to projects to $200 million. AB 1683 will be heard by this Committee today.

REGISTERED SUPPORT / OPPOSITION:

Support

John Chiang, Treasurer, State of California (Sponsor)

Proterra

Motiv

California Against Waste

California Manufacturers and Technology Association

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098

Date of Hearing: April 4, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2334 (

Author:Mullin) – As Introduced Ver:February 18, 2016

Majority vote. Fiscal committee. Tax levy.

SUBJECT: Alternative energy financing

SUMMARY: Modifies the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Act to increase the annual amount of the sales and use tax (SUT) exclusion available for allocation by the CAEATFA and to extend the SUT exclusion to purchases of tangible personal property (TPP) by certain contractors, as provided. Specifically, this bill:

1. Extends the SUT exclusion to a lease or transfer of title of eligible TPP to any contractor for use in the performance of a construction contract for the participating party that will use that property as an integral part of the approved project (a "construction contract").
2. Increases the annual amount of SUT exclusions available for allocation to projects, including projects that involve specified construction contracts, as follows:
   1. For the 2016 calendar year, from $100 million to $575 million.
   2. For the 2017 calendar year and each calendar year thereafter, from $100 million to $350 million, plus any amounts unused or not granted from the previous calendar year.
3. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, process recycled feedstock, or develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
   
2. Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used to process recycled feedstock or used for the "design, manufacture, production, or assembly" of advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined.
   
3. Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion.
   
4. Requires CAEATFA to provide 20-day notice to the Legislature, once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals.
   
5. Repeals the CAEATFA's expanded authority to promote the use of advanced manufacturing and recycled feedstock as of January 1, 2021.
6. Imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property (TPP) in this state, unless the sale is specifically exempt from taxation. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption.

FISCAL EFFECT: Unknown

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:
   
   "AB 2334 increases the annual award cap of the California Alternative Energy and Advanced Transportation Authority (CAEATFA) sales and use tax exclusion (STE) from $100 million to $350 million and allows for rollover of unused funds from previous years, in addition to other small program changes. In doing so, AB 2334 gives CAEATFA the ability to further incentivize California-based jobs and manufacturing, while promoting clean technology and reducing pollution and energy consumption."
2. Arguments in Support. The sponsor of this bill states that, as of February 2016, the SUT exclusion program "reached its annual award cap and is currently oversubscribed. . . . Oversubscription is due to increasing application numbers and to the large scale of awards to electric vehicle and aerospace companies." The sponsor argues, "[w]ith the program's 2016 cap already oversubscribed, projects that would have significant economic and environmental benefits to the state will not receive an award."
   
3. CAEATFA Program: Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the "California Alternative Energy and Advanced Transportation Financing Authority" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources.
   
   The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. Generally, CAEATFA is authorized to provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees, and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects.
4. CAEATFA's SUT Exclusion Program. CAEATFA is also allowed to provide a SUT exclusion for certain specified projects. The first SUT exclusion was granted to Tesla in 2009. Shortly thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for the design, manufacture, production, or assembly of "advanced transportation technologies" and "alternative source" products, components, or systems. Alternative source products include cogeneration technology; energy conservation; and solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced manufacturing" to the list of eligible projects. Consequently, the SUT exclusion program was enlarged to include "advanced manufacturing" projects. SB 1128 also placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year.
   
   In 2013, AB 1422 (Jobs, Economic Development and the Economy), Chapter 540, Statutes of 2013, revised the definition of "participating party" for purposes of the SUT exclusion to include out-of-state and overseas entities. AB 1422 allowed an otherwise qualified out-of-state entity to apply for financial assistance and the SUT exclusion. The entity, however, must commit and demonstrate that it will be opening a manufacturing facility in California.
   

Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.

1. CAEATFA's Application Process for SUT Exclusion. California provides several tax incentives designed to encourage socially beneficial behavior, such as an increase in low-income housing, research and development activity, and overall economic activity. A major policy concern when enacting a tax incentive program is the possibility of rewarding behavior that would have occurred in the absence of the subsidy, known as "deadweight loss". The possibility of rewarding, instead of incentivizing, behavior has become an accepted reality for almost all tax incentive programs. The Legislature has attempted to address this problem by creating tax incentives programs that require potential beneficiaries to undergo a rigorous application process to ensure, on a case-by-case basis, that the state receives the desired benefit.
   
   One of the prime examples of such programs is the SUT exclusion administered by the CAEATFA. The CAEATFA has established a lengthy application process to ensure the efficient use of state resources by requiring each applicant to demonstrate a benefit to the state before an award may be granted. Before a SUT exclusion may be awarded, CAEATFA is required to determine the eligibility of an individual project based on a number of factors relating to the reduction in greenhouse gases and the creation of manufacturing jobs. Specifically, when evaluating an application, CAEATFA must consider the extent to which the project develops manufacturing facilities located in California; the extent to which the project will create new, permanent jobs in California; the extent to which the project results in a reduction of greenhouse gases; the unemployment rate in the area in which the project will be located; and any other factors that CAEATFA deems appropriate in accordance with this program, among other criteria. Most important among the factors is the requirement that applicants demonstrate a "net benefit" to the state. Known as the "net benefits" test, this test quantifies the fiscal and environmental benefits of the proposed project to ensure that the state receives a benefit beyond the cost of the SUT exclusion and is one of the most important factors that CAEATFA considers when awarding the exclusion. In this manner, the test attempts to address the "dead-weight" problem found within every subsidy. Projects approved for the exclusion receive a full exemption from the state and local portions of the SUT. The full SUT rate ranges from 7.5% to 10%, with a statewide average of 8.42%.

Once the exclusion has been granted, applicants are allowed three years to use the award but can request extensions from the CAEATFA Board. Amounts awarded in previous years, but not yet utilized, may not be recaptured by the CAEATFA. In November 2015, CAEATFA suspended acceptance of new applications due to the proposed program revisions and the development of the regulations to implement AB 199. Currently, $25 million of the 2016 annual amount remains unallocated.

1. What Does this Bill Do? This bill proposes to modify the existing CAEFTA program to: (a) increase the aggregate award amount available to eligible applicants in each calendar year, starting with 2017; (b) allow a rollover of unallocated funds to the following calendar year; and, (c) extend the SUT exclusion to a project where a contractor leases or purchases TPP for use in the performance of a construction contract for the participating party, as provided. With respect to the award amount, this bill would increase the cap from $100 million to $575 million (which includes unused funds from 2010-2014 calendar years) for the 2016 calendar year and to $350 million for the 2017 calendar year and each year thereafter. It appears that, of these amounts, at least $100 million plus any previously unallocated or unused amounts must be allocated each calendar year, beginning with the 2017 calendar year, exclusively to projects other than the specified construction contracts.
2. Oversubscription: What is the Problem? According to CAEATFA, a very diverse group of applicants are applying for the same funds. Last year, CAETFA had a high number of applications requesting an allocation of the SUT exclusion, and the existing cap of $100 million was quickly reached. With the expansion of the CAETFA program to include projects that process or utilize recycled feedstock, the number of SUT exclusion applications is expected to increase even more.
   
   During this Committee's informational hearing on February 22, 2016, the Executive Director of CAEFTA testified that the increased demand for the funds may be due to continued economic recovery, newly added categories of eligible projects and a number of applications requesting large SUT exclusion amounts. While historically small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications, in recent years CAEFTA has approved a number of applications for large projects with more than $20 million in SUT exclusions, such as for example, the ones submitted by Tesla, Atieva, Lockheed, Space X, and Solyndra.
   
   Existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Thus, applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects. Furthermore, the CAEFTA does not have the authority to utilize the unclaimed awards. Finally, CAEFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts simply disappear. The author believes that allowing a rollover of unallocated funds to the following calendar year and substantially increasing the annual SUT exclusion cap would help projects that would have significant economic and environmental benefits to the state.
3. Partial SUT Exemption for Purchases of Manufacturing and R&D Equipment. In 2013, Governor Brown signed AB 93 (Committee on Budget), Chapter 69, Statutes of 2013, which reformed California's economic development policies. The new law eliminated enterprise zones and other geographically targeted economic development areas and, instead, created three new tax benefits: (a) a temporary tax credit for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment; (b) a temporary SUT exemption on purchases of manufacturing equipment made by qualified taxpayers, capped at $200 million annually per taxpayer; and, (c) the California Competes Tax Credit program. Existing law limits the total annual amount of these three tax incentives to $750 million.
   
   With the passage of AB 93, sales and leases of certain manufacturing and R&D equipment may now qualify for the temporary SUT partial exemption. The partial exemption rate is currently set at 4.1875%, which means that sales of qualifying property sold to a qualified person are taxed at a rate of 3.3125% (7.5% current statewide tax rate minus 4.1875% partial exemption rate), plus any applicable district taxes. The exemption is available for purchases made until July 1, 2022. The program is generally self-certified, with little oversight from the State Board of Equalization (BOE). The program was created in such a way as to allow the partial SUT exemption to be taken immediately, without complicated forms and procedures.

Unlike CAEATFA's SUT exclusion, the partial SUT exemption does not necessarily attempt to encourage or incentivize beneficial behavior. Instead, the partial SUT exemption attempts to reduce the distortion from the imposition of a tax on a tax, otherwise known as "pyramiding". When manufacturers pay a SUT on tangible personal property, the tax is incorporated into the cost of a consumer product, often leading to double taxation. Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services provided by a single company instead of those that require multiple production steps.

1. The Interaction of the Partial SUT Exemption and the CAEFTA SUT Exclusion. To a large degree, the CAEATFA SUT program overlaps with the partial SUT exemption for manufacturing and R&D equipment. Thus, unless a project includes a purchase of manufacturing or R&D equipment worth more than $200 million, the purchase may qualify for the partial SUT exemption, which requires no application or allocation. However, as noted above, the partial SUT exemption provides tax relief only for the state portion of the SUT. When the partial SUT exemption was enacted, the BOE estimated that General Fund revenue would decrease annually by more than $600 million ($637 million in fiscal year (FY) 2014-15 and $681 million in FY 2015-16). However, the most recent data demonstrates that the exemption is currently underutilized. The total exemption amount claimed in FY 2014-15 was $91.2 million; in the first four months of FY 2015-16, the amount was only $77.2 million. The underutilization problem may be due to complexities of the program and/or may be attributed to the conditional nature of the SUT exemption, where only a certain type of property and purchasers qualify for the exemption. It may be argued that the partial nature of the exemption, where some amount of SUT still needs to be collected by the vendor, also contributes to the underutilization problem.

Meanwhile, the CAEATFA exclusion program has been oversubscribed. Although the program has no per-purchaser limit, it is subject to the overall annual cap of $100 million and most likely will be oversubscribed in 2016 and 2017. In the absence of legislative intent, it is unclear which types of projects should receive priority.

The CAEATFA program had been in place for many years prior to the enactment of the partial SUT exemption. It is unknown whether the underutilization of one program has contributed to the oversubscription for the other program or whether there is any connection between the two programs. However, in light of the underutilization of the partial SUT exemption and oversubscription of the CAEATFA program, the Committee may consider restructuring the CAEATFA program to prioritize certain projects, in addition to allowing the recapture of allocated funds and rollover of unallocated funds. Furthermore, as an alternative to the proposed increase in the $100 million cap, the Committee may also consider authorizing CAEATFA to exempt only the local portion of the SUT in the case of projects that otherwise meet the eligibility requirements for the partial SUT exemption.

1. Construction Contracts: Definition of "Sale" or "Purchase." In 2012, SB 1128 revised R&TC Section 6010.8, which authorizes the SUT exclusion to allow a "participating party" to purchase or lease qualified TPP directly from the seller, removing the need for CAEATFA to act as an intermediary. The term "participating party" means, among others, a person, federal or state agency, city or county, state college or university, school district or other political entity engaged in the business or operations in the state, whether for profit or non-profit, that applies for financial assistance from the CAEATFA for the purpose of implementing a project.
   
   Prior to 2013, in order to qualify for the exemption, the participating party had to purchase the property without payment of tax and then resell the equipment to CAEATFA. The transfer was excluded from the SUT as a transfer from a participating party to CAEATFA. The participating party and CAEATFA would then enter into a lease agreement and upon complete installation of the TPP, ownership of that property would be transferred from the CAEATFA to the participating party. Alternatively, CAEATFA was able to purchase the specified equipment on behalf of the participating party, financing the purchase through a bond or loan, and the participating party would lease the equipment from CAEATFA. As the purchaser of the equipment, the CAEATFA paid no sales tax on the purchase, nor was it required to collect the use tax on the lease receipts. SB 1128 simplified these complicated sale-lease transactions that are not feasible for business reasons by providing that a lease or transfer of TPP constituting a "project" under the SB 71 Program to a participating party is neither a "sale" nor "use" and, thus, is exempt from the SUT.
   

This bill proposes to simplify sale-lease transactions further for certain construction contracts. According to CAEFTA, the main purpose of this modification is to streamline the application of the SUT exclusion for contractors and subcontractors. Existing law only covers transfers of title of TPP property to the participating party, not a contractor or subcontractor performing the work on the eligible project. Thus, only the participating party may issue a certificate to the retailers for the purchases of materials, fixtures, machinery, equipment or other TPP. Although a contractor may be able to utilize the SUT exclusion in certain circumstances, the process to ensure that the contractor is eligible to claim the exclusion when purchasing TPP is complicated and cumbersome. Construction contractors and participating parties must follow specific procedures when providing exemption certificates to suppliers and preparing contractual agreements. Essentially, a construction contract must be structured in a way, per BOE's instructions, that allows the title to materials to be transferred from the vendor selling TPP directly to the participating party. In some instances, a contractor may not be able to use the SUT exclusion because the participating party has become eligible for the exclusion after a contract was performed.

Usually, CAEATFA directs applicants to the BOE for advice regarding the use of contractors since the BOE is responsible for administering the SUT law. To simplify the process, this bill proposes to amend the existing definition of "sale" and "purchase" in Section 6010.8 to allow any contractor to claim the SUT exclusion when the contractor purchases TPP for use in the performance of a construction contract for the participating party. This provision would only apply if the participating party will use the TPP as an integral part of the approved project.

It seems that while increasing the overall annual allocation amount for the SUT exclusion, this bill would require that at least $100 million be awarded annually to projects other than projects involving the abovementioned leases and purchases of TPP by contractors. Stated differently, this bill would create two categories of projects: projects that will become eligible for the SUT exclusion award only after the effective date of this bill and projects that are already eligible under existing law. Although unclear, it appears that the overall annual allocation amount will depend on the type of projects eligible for the awards.

1. Related Legislation. AB 1683 (Eggman) is similar to this bill. AB 1683, among other things, would increase the annual amount of SUT exclusions available for annual allocations to projects to $200 million. AB 1683 will be heard by this Committee today.

REGISTERED SUPPORT / OPPOSITION:

Support

John Chiang, Treasurer, State of California (Sponsor)

Proterra

Motiv

California Against Waste

California Manufacturers and Technology Association

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098