Existing law prescribes the manner in which contracts or agreements may be created. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would establish, in a rental agreement of heavy equipment property by a qualified heavy equipment renter, a rebuttable presumption that the parties agreed to the addition of estimated personal property tax reimbursement to the rental price of heavy equipment property to a lessee if specified conditions occur, including that the rental agreement states that the estimated personal property tax reimbursement amount charged is the amount estimated by the qualified heavy equipment renter owed for personal property tax on that heavy equipment property for a specified lien date and that any amounts in excess of the actual amount of personal property taxes owed on the heavy equipment property will be remitted to the State Board of Equalization for deposit into the state General Fund.

Existing law prescribes the manner in which contracts or agreements may be created.

This bill would establish, in a rental agreement of heavy equipment property by a qualified heavy equipment renter, a rebuttable presumption that the parties agreed to the addition of estimated personal property tax reimbursement to the rental price of heavy equipment property to a lessee if specified conditions occur, including that the rental agreement states that the estimated personal property tax reimbursement amount charged is the amount estimated by the qualified heavy equipment renter owed for personal property tax on that heavy equipment property for a specified lien date, date and that any amounts in excess of the actual amount of personal property taxes owed on the heavy equipment property will be remitted to the State Board of Equalization for deposit into the state General Fund.

This bill would require, on or before October 1, 2017, and on or before every October 1 each year thereafter, a qualified heavy equipment renter to file a return with the State Board of Equalization, in the form and manner as prescribed by the board, if the qualified heavy equipment renter has collected estimated personal property tax reimbursement amounts in excess of the actual amount of personal property tax owed on the heavy equipment property for the previous fiscal year lien date. The bill would require the qualified heavy equipment renter to remit that excess estimated personal property tax reimbursement amount with the return and would require the board to deposit those amounts into the General Fund.

Existing law prescribes the manner in which contracts or agreements may be created.

This bill would establish, in a rental agreement of heavy equipment property by a qualified heavy equipment renter, a rebuttable presumption that the parties agreed to the addition of estimated personal property tax reimbursement to the rental price of heavy equipment property to a lessee if specified conditions occur, including that the rental agreement states that the estimated personal property tax reimbursement amount charged is the amount estimated by the qualified heavy equipment renter owed for personal property tax on that heavy equipment property for a specified lien date, and that any amounts in excess of the actual amount of personal property taxes owed on the heavy equipment property will be remitted to the State Board of Equalization for deposit into the state General Fund.

This bill would require, on or before October 1, 2017, and on or before every October 1 each year thereafter, a qualified heavy equipment renter to file a return with the State Board of Equalization, in the form and manner as prescribed by the board, if the qualified heavy equipment renter has collected estimated personal property tax reimbursement amounts in excess of the actual amount of personal property tax owed on the heavy equipment property for the previous fiscal year lien date. The bill would require the qualified heavy equipment renter to remit that excess estimated personal property tax reimbursement amount with the return and would require the board to deposit those amounts into the General Fund.

The Sales and Use Tax Law imposes a tax 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 of tangible personal property purchased from a retailer for the storage, use, or other consumption in this state measured by sales price. That law defines the terms gross receipts and sales price.

This bill would, on and after January 1, 2017, exclude from the terms gross receipts and sales price the amount of any personal property tax reimbursement added to the rental price of heavy equipment property if the rental agreement meets the conditions of the presumption created by this bill.

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 to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which generally conforms to the Sales and Use Tax Law. Amendments to the Sales and Use Tax Law are incorporated into these laws.

Existing law requires the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that notwithstanding those provisions, no appropriation is made and the state shall not reimburse local agencies for sales and use tax revenues lost by them pursuant to this bill.

Date of Hearing: May 11, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2749

Author:(Brough) – As Amended Ver:May 3, 2016

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

SUMMARY:

This bill allows a heavy equipment renter to add an estimated property tax reimbursement to the rental price of heavy equipment that is paid by the lessee. Specifically, this bill:

1. Creates a rebuttable presumption that the renter and lessee agree to the personal property tax reimbursement if the following conditions are met:
   1. The personal property tax reimbursement is part of the rental agreement;
   2. The estimated tax reimbursement is separately stated and charged on the rental agreement;
   3. The rental agreement states that the reimbursement amount is the amount estimated by the renter owed for personal property tax, and any excess amount of the actual property tax owed will be remitted to the BOE for deposit to the General Fund; and,
   4. The estimated property tax reimbursement is not more than 0.75% of the rental price of the heavy equipment property.
2. Defines “heavy equipment property” and “qualified heavy equipment renter” for the purposes of the property tax reimbursement.
3. Requires every qualified heavy equipment renter to register with BOE on a form that BOE prescribes.
4. Requires a qualified heavy equipment renter to file a return with BOE on or before September 30 for the preceding 12-month period ending August 31. This return will show the ad valorem property tax levied on qualified heavy equipment property and the reimbursement collected in total for the prior 12 months. If a qualified renter collected more in reimbursement than the tax that was levied, the renter must pay the BOE the excess reimbursement to be deposited into the General Fund (GF).

FISCAL EFFECT:

1. Significant one-time costs to BOE in excess of $250,000 to develop infrastructure and processes needed for implement the proposed property tax reimbursement program for heavy equipment rentals.
2. Possible minor GF revenue increases in the event that a heavy equipment renter is reimbursed an amount in excess of actual personal property tax owed, which under this bill would result in the renter paying the difference into the GF.

COMMENTS:

1. Purpose. According to the author, this bill is intended to authorize heavy equipment rental companies to separately state an amount for property tax reimbursement and protect these companies from future legal challenges over this separately stated charge.
2. Background. Under existing law, personal property used in a trade or business is generally taxable. Property owners must file an annual property statement with the county assessor to report the cost of the property, and the assessor values the personal property at its current fair market value. Generally, the assessor determines the current fair market value based on the property’s acquisition cost with adjustments for inflation and depreciation.

Personal property intended for rent in the regular course of business that is not rented on the January 1 lien date is exempt from taxation for the upcoming fiscal year (July 1 to June 30). That property is regarded as business inventory on that particular day, even if the property is rented in the regular course of business for the other 364 days of the year. According to the Legislative Analyst’s Office, this results in heavy equipment renters paying property taxes on around 60 to75% of their rental stock.

According to the author’s office, heavy equipment rental companies face certain administrative challenges when complying with the property tax on personal property. This includes complex paperwork requirements and disagreements with county assessors across multiple jurisdictions about the assessed value of rental property.

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

Date of Hearing: April 18, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2749 (

Author:Brough) – As Amended Ver:March 28, 2016

Majority vote. Fiscal committee.

SUBJECT: Heavy equipment rentals: rental agreements

SUMMARY: Establishes a rebuttable presumption that the parties agreed to the addition of estimated personal property tax reimbursement to the "rental price" of "heavy equipment property" to a lessee if specified conditions occur. Specifically, this bill:

1. Provides that the question of whether a "qualified heavy equipment renter" may add estimated personal property tax reimbursement to the "rental price" of "heavy equipment property" to a lessee depends solely upon the terms of the rental agreement.
2. Establishes a presumption that the parties agreed to the addition of estimated personal property tax reimbursement to the "rental price" of "heavy equipment property" to a lessee if all of the following conditions occur:
   1. The rental agreement expressly provides for the addition of estimated personal property tax reimbursement;
   2. Estimated personal property tax reimbursement is separately stated and charged on the rental agreement;
   3. The rental agreement states that the estimated personal property tax reimbursement amount charged is the amount estimated by the "qualified heavy equipment renter" owed for personal property tax on that "heavy equipment property" for a specified lien date, and that any amounts exceeding the actual amount of personal property taxes owed on the "heavy equipment property" will be remitted to the State Board of Equalization (BOE) for deposit in the state General Fund; and,
   4. The estimated personal property tax reimbursement amount shall not exceed 0.75% of the "rental price" of the "heavy equipment property".
3. Provides that the presumptions established by this bill are rebuttable presumptions.
4. Requires, on or before October 1, 2017, and on or before every October 1 each year thereafter, a "qualified heavy equipment renter" to file a return with the BOE, in the form and manner prescribed by the BOE, if the "qualified heavy equipment renter" has collected estimated personal property tax reimbursement amounts exceeding the actual amount of personal property tax owed on the "heavy equipment property" for the previous fiscal year lien date.
5. Requires the "qualified heavy equipment renter" to remit that excess estimated personal property tax reimbursement amount with the return and the BOE to deposit those amounts in the General Fund.
6. Defines "rental price" as the total amount of the charge for renting the "heavy equipment property", excluding any separately stated charges that are not rental charges, including, but not limited to, separately stated charges for delivery and pickup fees, damage waivers, environmental mitigation fees, sales tax reimbursement, or use taxes.
7. Defines "heavy equipment property" as rental property of a "qualified heavy equipment renter".
8. Defines a "qualified heavy equipment renter" as a renter that satisfies both of the following:
   1. The principal business of the renter is the rental of qualified heavy equipment; and,
   2. The renter is engaged in a line of business described in Code 532412 or 532310 of the North American Industry Classification System published by the United States Office of Management and Budget, 2012 edition.

EXISTING LAW:

1. Prescribes the manner in which contracts or agreements may be created.
2. Provides that all property is taxable absent a specific constitutional or statutory exemption. The county assessor determines taxability each year, generally on the January 1 lien date.

FISCAL EFFECT: The BOE states that the revenue impact is indeterminable, but that there is a potential for state General Fund revenue gains.

COMMENTS:

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

Renters of Heavy Equipment must pay local personal property taxes on the value of the heavy equipment they rent. The tax is applied only if the equipment is out on rent January 1. Local assessors are responsible for the assessment and determination of value of the equipment. Rental companies have many disputes over the value of the equipment. Valuation, payment, audits and appeals of the personal property tax are expensive and time consuming for renters. This bill authorizes renters of heavy equipment to include a line item on a rental contract for the costs of personal property tax payment. The Legislative Analyst Office in a report has commented the personal property tax is a challenge for taxpayers to administer.

The language is only authorization for the charge, it does not require the rental company to collect the charge. It does not cost state or local governments any property tax revenue. The personal property tax collects an estimated $21 million in revenue. That amount would still be collected in full and paid to the counties. Customers retain choice of whether to pay the charge or use different equipment, or a separate Rental Company. The authorization protects equipment companies from future legal challenges over the charge. Heavy equipment rentals are an important component of the heavy construction industry including road and infrastructure construction.

1. The BOE notes the following in its staff analysis of this bill:
   
   1. Nothing prevents these rental companies from seeking reimbursement currently: "The law does not prohibit rental companies from separately stating a charge for reimbursement currently."
      
   2. Bill only requires returns when excess tax reimbursement occurs: "This could be problematic, since the BOE will have no knowledge of whether a qualified renter collected excess tax reimbursement and simply failed to file a return."
      
   3. Bill has no administrative provisions: "The bill contains no provisions for the administration and collection of the excess tax reimbursement, such as return and remittance due dates, applicable penalty and interest for late payments, appeals rights for any disputed amounts, etc. Staff will work with the author's office to address this concern as the bill progresses."
      
   4. Use tax will apply to the proposed property tax reimbursement amount: "Under the Sales and Use Tax Law, any lease or rental of tangible personal property for a consideration is a 'sale' and a 'purchase' (except for certain items not relevant here). Generally, a lease of tangible personal property is regarded as a continuing 'sale' and a continuing 'purchase,' and the use tax applies to the rental amount, including any payments required by the lease, such as amounts paid for personal property taxes on the leased property. The lessor is required to collect the use tax from the lessee at the time the rentals are paid by the lessee. Accordingly, any separately stated property tax reimbursement collected by a renter under this bill will be subject to the use tax."
      
2. Committee Staff Comments:
   
   1. California's property tax: Personal property used in a trade or business is generally taxable, and is valued each lien date (i.e., January 1) at its current fair market value, taking into account the property's age and condition. The tax rate applied to personal property is the same as that applied to real property^[1] – 1% plus voter-approved debt rates used to finance local infrastructure projects.^[2]

Historically, all business property was subject to taxation. In 1979, however, the Legislature established a "business inventory exemption" to remove any incentives companies had to locate their product inventories in other states. Thus, rental equipment that is not being leased or rented on the January 1 lien date qualifies as business inventory and is exempt from taxation. As a result, the Legislative Analyst's Office (LAO) notes that rental companies only pay annual property taxes on the portion of their equipment – typically 60 to 75% - that is rented on the lien date.

• 1. The distribution of property tax revenues: Generally, personal property tax revenues are allocated according to the property's "situs" (i.e., location) and accrue only to those taxing jurisdictions in the tax rate area where the property is located. Pursuant to Property Tax Rule 204, property rented on a daily, weekly, or other short-term basis of six months or less, has situs at the place where the owner normally keeps the property. The BOE notes that, "[f]or property rented for an extended, but unspecified, period or more than a 6-month term" the assessor determines situs based on the rentee's use.
     
  2. What would this bill do? This bill establishes a rebuttable presumption that in a heavy equipment rental agreement the parties agreed to the addition of estimated personal property tax reimbursement to the heavy equipment rental price under specified conditions.
     
  3. What is the problem? The author's office notes that California's system of assessing and taxing personal property, particularly heavy equipment rentals, is very complicated. Record-keeping is often a challenge. In addition, heavy equipment rental companies with multiple locations in the state are often subjected to numerous audits each year in different jurisdictions. The author notes that, "AB 2749 would provide express authority to the renter to charge a fee to the rentee to cover the costs of administering the collection of the property tax on heavy equipment." The author's office further notes that current law is silent regarding a rental company's authority to charge for property tax reimbursement. The BOE, however, notes that there is nothing in current law that would prohibit rental companies from adding a surcharge for personal property tax reimbursement. Moreover, it is not clear to Committee staff why a line item in a rental agreement would be subject to legal challenge. Rental companies are ostensibly already charging their customers for the economic burden of the personal property tax. A separate line item would just make the cost more transparent. Moreover, while this bill would authorize heavy equipment renters to add a separate line item to their rental contracts, it would do nothing to take rental equipment out of the local tax base. Rental companies would continue to have to pay personal property taxes on this equipment at the local level, with all the attendant administrative complexities involved. Indeed, it could be argued that this bill would add another administrative complication by requiring renters to track reimbursement payments, compare the total to actual taxes owed, and remit the difference to the state.
  4. A precedent for ad hoc treatment? The current system of personal property taxation poses certain administrative difficulties for heavy equipment rental companies. The LAO notes that large rental companies have as many as 500 rental pieces at each branch and that their rental fleets move regularly between branches based on project demand. That said, this is by no means the only industry that faces challenges resulting from operating in numerous counties. Moreover, conflicts concerning the proper valuation of business property are part and parcel of the current system. These administrative difficulties have even led some to question the overall utility of the personal property tax as a mechanism for efficiently raising revenues. To this end, the LAO has noted:

Due to its market value assessment, appeals workload, and audit requirements, the personal property tax is a relatively costly tax for businesses to comply with and for county assessors to administer, especially when compared with the property tax as it applies to real property.

That said, the Committee may wish to consider the inherent drawbacks of adopting an ad hoc approach designed to alleviate the burdens faced by one industry. Such action could establish a precedent for other industries seeking special treatment based on the peculiar nature of their business model.

• 1. Definitional clarity: This bill defines a "qualified heavy equipment renter" as a renter that satisfies both of the following: (1) the principal business of the renter is the rental of qualified heavy equipment, and (2) the renter is engaged in a line of business described in Code 532412 or 532310 of the North American Industry Classification System. This bill does not, however, appear to define the term "qualified heavy equipment". This bill does, however, provide a definition for "heavy equipment property" – namely, the rental property of a qualified heavy equipment renter. The Committee may wish to consider adding a specific definition of qualified heavy equipment in line with previous bills on this subject.
  2. Code placement: This bill currently places the presumption language in the Civil Code, alongside various cannons of contractual interpretation from the 19^th century. The author and Committee may wish to consider whether it would preferable to place this bill's language in the Revenue and Taxation Code.
  3. Related legislation:
     
     1. AB 2114 (Pan), of the 2013-14 Regular Session, would have imposed an in lieu tax on every qualified renter of qualified heavy equipment (QHE) at the rate of 0.75% of the rental price, as specified. AB 2114 was held by the Assembly Committee on Appropriations.
     2. AB 1055 (Pan), of the 2013-14 Regular Session, would have imposed an in lieu tax on every qualified rentee of QHE at an unspecified rate. AB 1055 was never heard by this Committee and was returned to the Chief Clerk.
        
     3. AB 1941 (Ma), of the 2011-12 Regular Session, would have imposed an in lieu tax on every qualified lessee of QHE at the rate of 1.25% of the gross receipts from the lease or rental of QHE. AB 1941 was held in this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

United Rentals

Opposition

None on file

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

1. Real property includes land, buildings, and other permanent structures, whereas personal property primarily consists of business property, such as manufacturing equipment, computer systems, and rental equipment. The LAO notes that, in FY 2010-11, personal property accounted for roughly 4% of the total taxable value of all property in California and generated about $2 billion in property taxes. ↑

2. The LAO notes that, in 2013, the statewide average rate, inclusive of voter-approved debt rates, was 1.19% of assessed value. ↑