Bills

AB 3197: Property tax: exemptions: personal property used in space flight.

Session Year: 2017-2018
House: Assembly
Latest Version Date: 2018-03-22

Version:

The California Constitution authorizes the Legislature to classify personal property for differential taxation or for exemption by means of a statute approved by a ²/₃ vote of the membership of each house. Pursuant to this constitutional authorization, existing property tax law, for the January 1, 2014, lien date to and including the January 1, 2024, lien date, exempts qualified property, as defined, for use in space flight, as specified. Existing law repeals this exemption as of July 1, 2025.

This bill would extend to an unspecified date the operation of the property tax exemption for qualified property used in space flight. By extending the operation of this exemption, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

Existing law requires the state to reimburse local agencies annually for certain property tax revenues lost as a result of any exemption or classification of property for purposes of ad valorem property taxation.

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

This bill would take effect immediately as a tax levy.

The Corporation Tax Law imposes taxes upon, according to, or measured by, net income, as specified. The Corporation Tax Law, in modified conformity to a credit allowed under federal law, allows a credit against taxes imposed by that law for increasing research expenses, as defined.This bill would make nonsubstantive changes to the provisions allowing that credit.

Version:

The people of the State of California do enact as follows:SECTION 1.Section 242 of the Revenue and Taxation Code is amended to read:242.

(a)There is exempted from the taxes imposed by this part qualified property for use in space flight.

(b)For purposes of this section:

(1)Qualified property means any of the following:

(A)Tangible personal property, whether raw materials, work in process or finished goods, that has, or upon manufacture, assembly, or installation has, space flight capacity, including, but not limited to, an orbital space facility, space propulsion system, space vehicle, launch vehicle, satellite, or space station of any kind, and any component thereof, regardless of whether that property is to be ultimately returned to this state.

(B)Fuel of a quality that is not adaptable for use in ordinary motor vehicles, but is produced, sold, and used exclusively for space flight.

(2)Space flight means any flight designed for suborbital, orbital, or interplanetary travel by a space vehicle, satellite, space facility, or space station of any kind.

(c)The exemption established by this section shall not be denied by reason of failure, postponement, or cancellation of a launch of a space vehicle, satellite, space facility, or space station of any kind, or the destruction of any launch vehicle or any component thereof, of a launch vehicle, but the exemption shall not apply to any material that is not intended to be launched into space.

(d)This section shall be operative from the January 1, 2014, lien date to, and including, the January 1, 2024, January 1, ___, lien date, and is inoperative for any lien date thereafter.

(e)A taxpayer shall provide, upon request of the assessor, evidence that the qualified property exempted from the taxes imposed by this part pursuant to this section has been or will be used as described in subparagraph (A) of paragraph (1) of subdivision (b).

(f)The exemption provided by this section from the taxes imposed by this part shall be limited to taxpayers that have a primary business purpose in space flight activities.

(g)This section shall remain in effect only until July 1, 2025, July 1, ___, and as of that date is repealed.

SEC. 2.

If the Commission on State Mandates determines that this act contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made pursuant to Part 7 (commencing with Section 17500) of Division 4 of Title 2 of the Government Code.

SEC. 3.

Notwithstanding Section 2229 of the Revenue and Taxation Code, no appropriation is made by this act and the state shall not reimburse any local agency for any property tax revenues lost by it pursuant to this act.

SEC. 4.

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

SECTION 1.Section 23609 of the Revenue and Taxation Code is amended to read:23609.For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the tax, as defined by Section 23036, an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:(a)For each taxable year beginning before January 1, 1997, both of the following modifications shall apply:(1)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.(2)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 12 percent.(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.(3)For each taxable year beginning on or after January 1, 2000, both of the following shall apply:(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.(c)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or use tax provided by Section 6378.(2)Qualified research and basic research shall include only research conducted in California.(d)The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, relating to basic research, shall be modified so that basic research, for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:(1)Basic research conducted outside California.(2)Basic research in the social sciences, arts, or humanities.(3)Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.(4)Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).(e)(1)In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code, relating to qualified organization, shall be modified to include both of the following:(A)A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code, relating to definition of institution of higher education.(B)A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, relating to exemption from taxation, is not a private foundation, is designated a specialized laboratory cancer center, and has received Clinical Cancer Research Center status from the National Cancer Institute.(2)For purposes of this subdivision:(A)Biopharmaceutical research activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.(B)Other biotechnology research and development activities means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.(f)In the case where the credit allowed by this section exceeds the tax, the excess may be carried over to reduce the tax in the following year, and succeeding years if necessary, until the credit has been exhausted.(g)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to amounts paid to certain research consortia, is modified to read this part or Part 10 (commencing with Section 17001).(h)(1)For each taxable year beginning on or after January 1, 2000:(A)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.(B)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.(C)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.(2)Section 41(c)(4)(B) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code, relating to in general, may be made for any taxable year of the taxpayer beginning on or after January 1, 1998. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.(4)Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall not apply.(i)Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.(j)Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, is modified by each of the following:(1)The last sentence shall not apply.(2)If the amount determined under Section 41(a) of the Internal Revenue Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.(k)Section 41(a)(3) of the Internal Revenue Code shall not apply.(l)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and Federal laboratories, shall not apply.(m)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.

The people of the State of California do enact as follows:SECTION 1.Section 23609 of the Revenue and Taxation Code is amended to read:23609.

For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the tax (as tax, as defined by Section 23036) 23036, an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:

(a)For each taxable year beginning before January 1, 1997, both of the following modifications shall apply:

(1)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.

(2)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 12 percent.

(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:

(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.

(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.

(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:

(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.

(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.

(3)For each taxable year beginning on or after January 1, 2000, both of the following shall apply:

(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.

(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.

(c)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or use tax provided by Section 6378.

(2)Qualified research and basic research shall include only research conducted in California.

(d)The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, relating to basic research, shall be modified so that basic research, for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:

(1)Basic research conducted outside California.

(2)Basic research in the social sciences, arts, or humanities.

(3)Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.

(4)Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).

(e)(1)In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code Code, relating to qualified organization, shall be modified to include both of the following:

(A)A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code. Code, relating to definition of institution of higher education.

(B)A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, relating to exemption from taxation, is not a private foundation, is designated a specialized laboratory cancer center, and has received Clinical Cancer Research Center status from the National Cancer Institute.

(2)For purposes of this subdivision:

(A)Biopharmaceutical research activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.

(B)Other biotechnology research and development activities means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.

(f)In the case where the credit allowed by this section exceeds the tax, the excess may be carried over to reduce the tax in the following year, and succeeding years if necessary, until the credit has been exhausted.

(g)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, amounts paid to certain research consortia, is modified to read this part or Part 10 (commencing with Section 17001).

(h)(1)For each taxable year beginning on or after January 1, 2000:

(A)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.

(B)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.

(C)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.

(2)Section 41(c)(4)(B) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code Code, relating to in general, may be made for any taxable year of the taxpayer beginning on or after January 1, 1998. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.

(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.

(4)Section 41(c)(5) of the Internal Revenue Code, relating to election of the alternative simplified credit, shall not apply.

(i)Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.

(j)Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough pass-thru of credit, is modified by each of the following:

(1)The last sentence shall not apply.

(2)If the amount determined under Section 41(a) of the Internal Revenue Code Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.

(k)Section 41(a)(3) of the Internal Revenue Code shall not apply.

(l)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal Federal laboratories, shall not apply.

(m)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.

Date	Status
May 25, 2018	Joint Rule 62(a), file notice suspended.
May 23, 2018	In committee: Set, first hearing. Referred to APPR. suspense file.
May 15, 2018	From committee: Do pass and re-refer to Com. on APPR. (Ayes 9. Noes 0.) (May 14). Re-referred to Com. on APPR.
May 7, 2018	In committee: Set, first hearing. Hearing canceled at the request of author.
Apr 2, 2018	Re-referred to Com. on REV. & TAX.
Mar 22, 2018	Referred to Com. on REV. & TAX.
Feb 17, 2018	From printer. May be heard in committee March 19.
Feb 16, 2018	Read first time. To print.

Date	Description	Location	Votes
May 14, 2018	Do pass and be re-referred to the Committee on [Appropriations]	Assembly Standing Committee on Revenue and Taxation	9 0 1 Passed

Key

Pro

Against

Did Not Vote

This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.

Positions by individuals are not included.

* Testimony in a hearing

** Position recorded in bill analysis

*** Position recorded in written testimony

Organization	Position	Date
California Manufacturers & Technology Association	* Support	May 14, 2018
City of Hawthorne	** Support	May 11, 2018
Commercial Spaceflight Federation	** Support	May 11, 2018
Los Angeles Area Chamber Of Commerce	** Support	May 11, 2018
Los Angeles County Economic Development Corporation	** Support	May 11, 2018
Port of Los Angeles	* Support	May 14, 2018
South Bay Workforce Investment Board, Inc.	** Support	May 11, 2018
SpaceX	** Support	May 11, 2018
The Spaceship Company	** Support	May 11, 2018
Virgin Galactic, Llc	** Support	May 11, 2018
Virgin Orbit, Llc	** Support	May 11, 2018

* Testimony in a hearing

** Position recorded in bill analysis

*** Position recorded in written testimony

Date of Hearing: May 23, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 3197

Author:(Burke) – As Amended Ver:March 22, 2018

Policy Committee:	Revenue and Taxation	Vote:	9 - 0

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

SUMMARY:

This bill extends, through an unspecified date, the business personal property tax exemption for qualified property used in space flight.

FISCAL EFFECT:

Annual local property tax revenue loss of at least $2.5 million each year after 2024, resulting in annual General Fund revenue loss of at least $1.2 million as a result of the Proposition 98 guarantee. Under the current exemption, which is available through the January 1, 2024 lien date, annual local property tax revenue loss is around $2.5 million. Given the growth of the industry, revenue loss will likely higher in future years.
Unknown, but likely absorbable, costs for county assessors. AB 3197 will most likely affect the Los Angeles County Office of the Assessor, but the cost likely is minimal.

COMMENTS:

Background and purpose. Personal property used in a trade or business is generally taxable and each year property owners must report their personal property to the county assessor. The California Constitution provides that the Legislature may exempt certain personal property from taxation. AB 777 (Muratsuchi), Chapter 13, Statutes of 2014, established the personal property tax exemption for space flight property and space flight fuel from 2014 through 2024. At that time, the rationale for this exemption would be to nurture the state’s emerging aerospace sector.

According to the author, AB 3197 will provide certainty to a rapidly evolving industry. Supporters argue that this bill will cultivate the burgeoning space commercialization sector while sending a signal to current and future companies that the state is “open for business.”

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

Date of Hearing: May 14, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 3197 (

Author:Burke) – As Amended Ver:March 22, 2018

2/3 vote. Tax levy. Fiscal committee.

SUBJECT: Property tax: exemptions: personal property used in space flight

SUMMARY: Extends the business personal property tax exemption for "qualified property" used in "space flight" through an unspecified number of additional years. Specifically, this bill:

Extends the sunset date of the property tax exemption available to qualified property used in space flight through an unspecified date.
Takes effect immediately as a tax levy.
Provides that if the Commission on State Mandates determines that this bill contains state-mandated costs, reimbursement to local agencies for those costs, will be made, as specified.
Provides the state will not reimburse any local agency for resulting lost property tax revenues.

EXISTING LAW:

Specifies that all tangible personal property (TPP) is taxable unless the law provides for a specific exemption. (California Constitution, Article XIII, Section 1.)
Authorizes the Legislature to exempt any TPP from property tax by a 2/3 vote. (California Constitution, Article XIII, Section 2.)
Imposes a property tax on TPP items used in a trade, profession, or business. (Revenue & Taxation Code (R&TC) Section 224.)
Exempts from property tax through fiscal year 2024-25, "qualified property" for use in "space flight". (R&TC Section 242.)
Defines "qualified property" as:
1. TTP that has "space flight" capacity. This includes an orbital space facility, space propulsion system, space vehicle, launch vehicle, satellite, or space station of any kind, and any component thereof;
2. TTP including raw materials, work in process or finished goods, that has, or upon manufacture, assembly, or installation has space flight capacity; and,
3. Space flight fuel, as specified.
Defines "space flight" as any flight designed for suborbital, orbital, or interplanetary travel by a space vehicle, satellite, space facility, or space station.
Prohibits the assessor from denying the exemption because of either of the following:
1. Failure, postponement, or cancellation of the space flight launch of a space vehicle, satellite, space facility, or space station of any kind; or,
2. Destruction of a launch vehicle, or any component thereof.
Requires taxpayers, upon the assessor's request, to provide evidence that the TTP has been, or will be, used consistent with the exemption.
Disallows the exemption to TPP the taxpayer does not intend to launch into space.
Allows the exemption regardless of whether the qualified property returns to California.
Limits the exemption to taxpayers who have a primary business purpose in space flight activities.
Sunsets the exemption after the January 1, 2024 lien date, which corresponds to property taxes levied for fiscal year 2024-25 (July 1, 2024 to June 30, 2025).
Repeals the statutory provision on July 1, 2025.

FISCAL EFFECT: None. For the next six fiscal years, this property is exempt from property tax.

COMMENTS:

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

In recent years, California's aerospace industry has become increasingly diverse with large programs including space launch providers, satellite makers and unmanned aircraft systems.

AB 3197 provides certainty to a rapidly evolving industry while ensuring that California's space innovators expand and prosper in the state.

The Los Angeles County Economic Development Corporation states in support of this bill:

AB 3197, which extends the property tax exemption for equipment used in [space] flight travel, is critically important to retaining, expanding and attracting high growth firms, such as SpaceX and Virgin Galactic, in California's fast growing space commercialization industry – a "homegrown" California industry that is not only carrying on the state's historical aerospace industry and expanding the bounds of what is possible in privately-supported space travel.

The rationale for AB 3197 is simple: the space industry, once dependent on defense, NASA and other federal appropriations, continues to grow exponentially in California through privately-supported space commercialization. It is an export-oriented industry that we must not take it for granted, as its location here is optional (not dependent on the locally-serving population). The space industry's decision – again, its choice – to be in our state is a great distinction and of great value, not only for our regional economy but also for our communities that benefit from the many thousands of well-paying, high-skilled jobs – at all phases along the product/service development value chain, as well as the indirect and induced "ripple effects" on wages, jobs, output, tax and investment dollars that follow into the state's different regions.

We, as economic developers and policy makers, would be wise to remember that a cornerstone of California's innovation based economy, including the Internet, emanated from our aerospace industry. Accordingly, it's critical that we ensure this all-important industry can continue to research, design, create, build and export here. Stability in state tax policy through AB 3197 will help ensure this by continuing a successful, sensible law that reflects and accommodates the realities of an evolving industry that supports both large and small businesses and suppliers working on a wide variety of programs and technologies including satellites, unmanned aircraft systems, space launch vehicles and space flight propulsion systems.

AB 3197 [. . . ] continues to cultivate the burgeoning space commercialization sector in California while simultaneously sending a message to all current and future space companies that "California is open for business."

Committee Staff Comments:
1. What does this bill do? The space flight exemption sunsets commencing with the January 1, 2025 lien date, which corresponds to property taxes levied for the 2025-26 fiscal year. Thus, space flight property remains exempt from property taxes for six more lien dates. This bill extends the exemption's sunset to an unspecified future lien date.
2. If six more lien dates remain, then why extend the sunset date now? One word –certainty: Certainty is a cornerstone of sound tax policy for both taxpayers and governmental entities. Without the certainty of the long-term personal property tax exemption, taxpayers in the space flight industry cannot effectively budget or plan for their future actions. Long-term investment projects are also less influenced by temporary incentives given the uncertainty of renewal.
3. The space commercialization frontier and the exemption's continuing mission: Proponents stress that a stable long-term policy for space flight companies supports on-going investment in California by California-based companies. Uncertainty over the tax landscape can influence decisions about whether to proceed and where. Exemption certainty allows existing companies and not-yet-conceived companies to make rational-fact based choices when evaluating whether to commit to California.
4. The mismatched voting threshold argument for sunsets: Sunsets allow the Legislature to review tax expenditure programs such as this personal property tax exemption. The Legislature enacts most expenditures with a majority vote, but a repeal of the same requires a 2/3 vote. However, unlike other tax expenditures, in the case of business personal property tax exemptions, the law requires a 2/3 vote to both create and repeal the exemption. Of course, the ease to allow an exemption to sunset gently by its own terms versus the exertion necessary to revoke a standing exemption is incomparable.
5. Picking a sunset date: The sunset extension date is currently unspecified. The proponents of this bill make a case for a permanent exemption. This Committee may wish to either make the exemption permanent or extend the sunset date.
6. The future of space flight: If space flight vehicles become as common as commercial passenger aircraft (subject to personal property tax) or as typical as private aircraft (subject to personal property tax), then a time may come to revisit the continued tax exemption of this property type.
7. The exemption only applies to certain personal property: Committee staff notes that the exemption is limited in scope to space flight property and space flight fuel. Other property owned and used by this industry is fully taxable such as any real property owned and all other business personal property holdings.
8. Past assessment disputes over the classification of propulsion systems: Previously, after the Los Angeles County Assessor's Office assessed certain propulsion systems, there was some uncertainty over the classification of specific items as: (i) supplies, (ii) business inventory, or (iii) machinery and equipment. Taxpayers filed assessment appeals seeking an exemption of the property under an existing "business inventory" exemption. Once the Legislature bestowed the current TPP exemption to space flight property and space flight fuel, however, the appeals and classification questions were rendered irrelevant for property taxes levied for the 10-year period that includes fiscal years 2014-15 through 2024-25.

Moreover, effective October 1, 2014, a State Board of Equalization administrative regulation was adopted to expressly include as business inventory certain space flight property. Specifically, space flight property, as specified, not operationally reusable, listed in the International Traffic in Arms Regulations on the United States Munitions List, the control over which is relinquished by the owner upon launch. Thus, this category of space flight property will remain exempt under the business inventory exemption after the statutory exemption sunsets.

1. Prior legislation: AB 777 (Muratsuchi), Chapter 13, Statutes of 2014, established the personal property tax exemption for space flight property and space flight fuel.

REGISTERED SUPPORT / OPPOSITION:

Support

City of Hawthorne

Commercial Spaceflight Federation

Los Angeles Area Chamber of Commerce

Los Angeles County Economic Development Corporation

South Bay Workforce Investment Board, Inc.

SpaceX

The Spaceship Company

Virgin Galactic, LLC

Virgin Orbit, LLC

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

Discussed in Hearing

7MIN

Assembly Standing Committee on Revenue and Taxation

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Authors shown for version:
Amended Assembly (3/22/2018)