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

This bill, until January 1, 2020, would partially exempt from those taxes the gross receipts from the sale of, and the storage, use, or other consumption in this state of, building and construction supplies, materials, equipment, and machinery, and the parts thereof, that are purchased for a specified use by a nonprofit corporation, as provided. The bill would make the purchaser liable for the payment of sales tax if the building and construction supplies, materials, equipment, and machinery, and the parts thereof, are removed, converted, or used in a manner not qualifying for the exemption.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

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

This bill, for a period of five years after the operative date of this bill, until January 1, 2020, would partially exempt from those taxes the gross receipts from the sale of, and the storage, use, or other consumption in this state of, building and construction supplies, materials, equipment, and machinery, and the parts thereof, that are purchased for a specified use by a nonprofit corporation, as provided. The bill would make the purchaser liable for the payment of sales tax if the building and construction supplies, materials, equipment, and machinery, and the parts thereof, are removed, converted, or used in a manner not qualifying for the exemption.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms generally to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes and specified state sales and use taxes the proceeds of which are deposited into the Local Revenue Fund, the Local Revenue Fund 2011, the Local Public Safety Fund, and the Education Protection Account.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

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

This bill bill, for a period of five years after the operative date of this bill, would partially exempt from those taxes the gross receipts from the sale of, and the storage and use of, storage, use, or other consumption in this state of, building and construction supplies, materials, equipment, and machinery, and the parts thereof, that are purchased for a specified use by a nonprofit corporation, as provided. The bill would make the purchaser liable for the payment of sales tax if the building and construction supplies, materials, equipment, and machinery, and the parts thereof, are removed, converted, or used in a manner not qualifying for the exemption.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms generally to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes and specified state sales and use taxes the proceeds of which are deposited into the Local Revenue Fund, the Local Revenue Fund 2011, the Local Public Safety Fund, and the Education Protection Account.

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

This bill would partially exempt from those taxes the gross receipts from the sale of, and the storage and use of, or other consumption in this state of, building and construction supplies, materials, equipment, and machinery, and the parts thereof, that are purchased for a specified use by a nonprofit corporation, as provided. The bill would make the purchaser liable for the payment of sales tax if the building and construction supplies, materials, equipment, and machinery, and the parts thereof, are removed, converted, or used in a manner not qualifying for the exemption.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms generally to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes and specified state sales and use taxes the proceeds of which are deposited into the Local Revenue Fund, the Local Revenue Fund 2011, the Local Public Safety Fund, and the Education Protection Account.

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

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2518

Author:(Gomez) – As Amended Ver:May 18, 2016

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

SUMMARY:

This bill creates a sales and use tax (SUT) exemption for building and construction supplies used by nonprofit organizations that build and rehabilitate affordable homes. Specifically, this bill:

1. Establishes an SUT exemption, from January 1, 2017 to January 1, 2020, for building and construction supplies, materials, equipment, and machinery, and the parts thereof that are purchased for use by a nonprofit corporation that has received a welfare exemption for the construction and rehabilitation of properties in California sold to "persons and families of low income."
2. Provides that the purchaser is liable for payment of the sales tax if, within one year from the date of purchase, the supplies purchased are moved outside California, converted for use not qualifying for the exemption, or used in a manner not qualifying for the exemption.

FISCAL EFFECT:

Annual state and local revenue loss in the range of $332,000, including $175,000 GF.

COMMENTS:

1. Purpose. According to the author, AB 2518 will help increase construction of affordable housing in California. It would do this by providing tax relief to certain nonprofits that build homes to be sold to low-income families.
2. Habitat for Humanity. Under the eligibility rules established in this bill, Habitat for Humanity would be one of only a small number of organizations eligible for the exemption.
3. Eligible items. AB 2518 creates a sales and use tax exemption for a broad range of goods, including flooring, lumber, paint, stucco, as well as ceiling fans, stoves, generators, or even bulldozers, pick-up trucks and tractors. Therefore, an organization could get a partial sales tax exemption for equipment it could eventually use for projects that aren’t for the construction of affordable housing. For example, an organization could buy a pick-up truck for the purpose of helping with a construction project, but then transition that pick-up truck for another purpose after a year. The Committee may wish to limit eligible items to goods and materials that are part of the home itself, such as flooring, lumber, and sheetrock. This will reduce cost pressures while ensuring that the exemption goes toward the intended use of encouraging affordable home construction.
4. Recent amendments. AB 2518 was amended on May 18, 2016 to make the sales and use tax exemption a full exemption rather than a partial exemption. Earlier versions of the bill exempted only the GF portion of the state sales and use tax, and the local government portion still applied to qualified goods purchased by an organization such as Habitat for Humanity. By making the exemption a full exemption, the May 18 amendments make AB 2518 more valuable to nonprofits, but more costly for local governments

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 2518 (

Author:Gomez) – As Amended Ver:April 28, 2016

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: nonprofit corporation: building and construction supplies

SUMMARY: Establishes a partial sales and use tax (SUT) exemption for building and construction supplies purchased for use by specified nonprofit corporations. Specifically, this bill:

1. Establishes a partial SUT exemption for building and construction supplies, materials, equipment, and machinery, and the parts thereof (collectively, "construction supplies"), that are purchased for use by a nonprofit corporation that is exempt from federal income taxation under Internal Revenue Code Section 501(c)(3) and that has received a welfare exemption under Revenue and Taxation Code (R&TC) Section 214.15 for construction and rehabilitation of properties in California sold to "persons and families of low income".
2. Defines "persons and families of low income" by reference to Health and Safety Code Section 50093.
3. Provides that, notwithstanding any provision of the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law, the exemption shall not apply with respect to any tax levied by a county, city, or district pursuant to either of those laws.
4. Provides that the exemption shall not apply with respect to any tax levied pursuant to:
   1. R&TC Section 6051.2 or 6201.2;
   2. Section 35 and Section 36(f) of Article XIII of the California Constitution; or,
   3. R&TC Section 6051 or 6201 that is deposited in the State Treasury to the credit of the Local Revenue Fund 2011.
5. Contains a standard recapture provision. Specifically, if a purchaser certifies in writing to the seller that the construction supplies purchased without tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt, and within one year from the date of purchase: (1) removes the construction supplies outside California, (2) converts the construction supplies for use not qualifying for the exemption, or (3) uses the construction supplies in a manner not qualifying for the exemption, the purchaser shall be liable for payment of the sales tax with applicable interest, as specified.
6. Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 180 days after this bill's effective date.
7. Automatically sunsets the exemption five years after its operative 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 that property is within the property tax exemption provided by Sections 4 and 5 of Article XIII of the California Constitution if that property is owned and operated by a nonprofit corporation, otherwise qualifying for the exemption under R&TC Section 214, that is organized and operated for the specific and primary purpose of building and rehabilitating single or multifamily residences for sale at cost to low-income families, with financing in the form of a zero interest rate loan and without regard to religion, race, national origin, or the sex of the head of household.

FISCAL EFFECT: The BOE estimates annual General Fund (GF) revenue losses of $175,000.

COMMENTS:

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

As you already know, California is one of the most expensive places to live.

Approximately 95 million American families suffer from housing problems including high cost burdens, overcrowding, and homelessness. One in three households spends more than 30 percent of their income on housing, and one in seven spends more than 50 percent. Local governments deal with overcrowding and congestion.

Employers struggle to attract and retain the labor force that is so vital to their bottom line. Low- to moderate-income working families work longer hours, endure long commutes or cut back on basic necessities in order to pay for housing.

Affordable homeownership helps families, builds wealth, and strengthens communities by providing substantial economic benefits to the homeowner family, their neighborhood, and the economy.

Several studies show potential benefits of homeownership to be: (1) Better education outcomes for children; (2) Lower community crime rates; (3) Less welfare dependency among households; (4) More household participation in civic affairs; (5) Better household health.

It is the Assemblymember's goal to increase construction of affordable housing in California – AB 2518 is a modest step toward this goal.

1. The BOE notes the following in its staff analysis of this bill:
   1. Non-qualifying uses of items: "The proposed exemption will not apply if, within one year from the date of purchase, the nonprofit corporation uses the building supplies, equipment, and machinery in a manner not qualifying for the exemption, converts the building supplies, equipment, and machinery from an exempt use to a non-qualifying use, or removes the qualifying building supplies, equipment, and machinery from California. Similar sales and use tax exemptions specify that the qualifying items must be used primarily in the qualifying activity. These exemptions define 'primarily' as 50 percent or more of the time. To administer this exemption consistent with similar sales and use tax exemptions, BOE staff recommends that the term 'primarily' be added to the bill. BOE staff will work with the author's office to address this concern."
   2. Partial exemptions complicate administration: "Currently, most sales and use tax exemptions are applied to the total applicable sales and use tax. However, several partial exemptions exist in which only the state tax portion (5.25%) of the sales and use tax rate is exempted, such as the farm equipment and teleproduction equipment exemptions. These partial exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently. This results in additional return processing workload for the BOE."
2. This bill is supported by Habitat for Humanity, which notes the following:

AB 2518 would exempt Habitat for Humanity from the state portion of sales and use tax when purchasing building and construction supplies, materials, equipment, machinery, and related parts for construction of low-income housing.

Habitat for Humanity (Habitat) brings homeownership opportunities to low income and very low income families who are unable to obtain conventional home financing and desire a permanent residence compared to a rental unit. In most cases, prospective Habitat homeowner families make a $500 down payment and they contribute 500 hours of "sweat equity" on the construction of their home. Because Habitat houses are built using donations of land, material, labor and government funding subsidies, like rental units, they are kept affordable.

1. 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. 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 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 were estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

• 1. 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 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.

• 1. What would this bill do? This bill would provide a partial SUT exemption for construction supplies purchased for use by specified nonprofit corporations exempt from federal income taxation under IRC Section 501(c)(3). Specifically, to receive the benefit of the exemption, the nonprofit would need to have received a property tax welfare exemption under R&TC Section 214.15. In addition, the supplies would need to be used for constructing and rehabilitating properties in California sold to low-income families. The BOE notes that the exemption would apply both to items consumed or used by the nonprofit to construct the low-income housing and to items that are physically incorporated into the housing.
  2. To whom would this bill apply? The BOE notes that, according to the California Department of Housing and Community Development and the California Housing Finance Agency, there are only a few nonprofit organizations that construct housing for sale to low-income families with zero-percent financing. For example, the Habitat for Humanity program constructs and rehabilitates homes for sale to such families, and provides long-term, zero-percent financing.
  3. Defining the scope of eligible property: This bill's current list of TPP potentially eligible for the SUT exemption is remarkably broad. Specifically, the exemption applies to "building and construction supplies, materials, equipment, and machinery" along with the parts thereof. Such items could include items actually incorporated into the housing, such as lumber, flooring, paint, tile, and lighting fixtures. In addition, the terms could be read expansively to include other TPP used to construct the housing, but not actually incorporated into the housing, such as electric generators, bulldozers, backhoe loaders, cranes, and even pick-up trucks. If the author's intent is to limit the exemption to materials actually incorporated into low-income housing, appropriate amendments should be taken to make this intent clear. In addition, the author may wish to clarify whether computers and office supplies used in administrative and management activities would also qualify for the proposed exemption.

REGISTERED SUPPORT / OPPOSITION:

Support

Habitat for Humanity

Opposition

None on file

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