AB 600: Sales and use taxes: exemption: manufacturing and research: useful life: electric power generation.
- Session Year: 2017-2018
- House: Assembly
- Latest Version Date: 2017-05-02
Existing sales and use tax laws impose taxes on retailers measured by 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, measured by sales price. Those laws partially exempt from those taxes, for a specified period, until July 1, 2018, the gross receipts from the sale of, and the storage, use, or other consumption of, specified tangible personal property purchased for use by a qualified person, as defined, to be used primarily in manufacturing or other processes, and in research and development. Consumables with a useful life of less than one year do not qualify for exemption, and useful life is defined by reference to state income or franchise taxes.
This bill bill, on and after January 1, 2018, and before July 1, 2028, would additionally define useful life by reference to manufacturer or other warranties, maintenance contracts, and normal replacement as established by industry or business practices and practices, would provide that those definitions would apply on and after July 1, 2014. The bill, for taxable years beginning on and after January 1, 2018, and before July 1, 2030, would additionally exempt from those taxes special purpose buildings and foundations used for the generation, production, storage, or distribution, as defined, of electric power power, and would expand the definition of qualified person to include, among others, a person primarily engaged in the business of electric power generation. The bill would declare the intent of the Legislature to enact legislation that would improve the states sales and use tax incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development. The bill would also make various findings and declarations.
This bill would take effect immediately as a tax levy.
Existing sales and use tax laws impose a tax 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. state, measured by sales price. Those laws provide various exemptions partially exempt from those taxes, including, among others, a partial exemption from state sales and use taxes until July 1, 2022, for sales or purchases of machinery, equipment, or certain other tangible personal property purchased for use primarily in research and development, the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, or other specified purposes. Existing law limits availability of the exemption to purchases by persons primarily engaged in certain lines of business and limits the total amount of purchases for which a person may claim the exemption to $2,000,000 per calendar year. for a specified period, the gross receipts from the sale of, and the storage, use, or other consumption of, specified tangible personal property purchased for use by a qualified person, as defined, to be used primarily in manufacturing or other processes, and in research and development. Consumables with a useful life of less than one year do not qualify for exemption, and useful life is defined by reference to state income or franchise taxes.
This bill would express the intent of the Legislature to improve the states manufacturing incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development and would make legislative findings in this regard. additionally define useful life by reference to manufacturer or other warranties, maintenance contracts, and normal replacement as established by industry or business practices and would provide that those definitions would apply on and after July 1, 2014. The bill, for taxable years beginning on and after January 1, 2018, and before July 1, 2030, would additionally exempt from those taxes special purpose buildings and foundations used for the generation, production, storage, or distribution, as defined, of electric power and would expand the definition of qualified person to include, among others, a person primarily engaged in the business of electric power generation. The bill would declare the intent of the Legislature to enact legislation that would improve the states sales and use tax incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development. The bill would also make various findings and declarations.
Existing sales and use tax laws impose 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 in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. Those laws provide various exemptions from those taxes, including, among others, a partial exemption from state sales and use taxes until July 1, 2022, for sales or purchases of machinery, equipment, or certain other tangible personal property purchased for use primarily in research and development, the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, or other specified purposes. Existing law limits availability of the exemption to purchases by persons primarily engaged in certain lines of business and limits the total amount of purchases for which a person may claim the exemption to $2,000,000 per calendar year.
This bill would express the intent of the Legislature to improve the states manufacturing incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development and would make legislative findings in this regard.
(a)The Legislature finds and declares all of the following:
(1)In 2013, California enacted a partial sales and use tax exemption for manufacturing and research-and-development equipment to encourage capital investments and job creation, and to make California more competitive in attracting new businesses and expansions of existing businesses.
(2)According to the 2015 Reshoring Initiative Data Report, the United States has brought approximately 130,000 manufacturing jobs back from other countries between 2010 and 2015. However, the report also shows that California only attracted 1,479 of those reshored jobs, meaning that California missed out on the opportunity to grow its manufacturing sector and create more high-paying middle-class jobs.
(3)The manufacturing sector is important for the long-term health of Californias economy and middle-class growth potential with an average annual wage of $83,000 and the multiplier effect that results in approximately 2.5 jobs created for every manufacturing job created.
(4)California must take steps now to create an investment environment that attracts more manufacturing and research-and-development jobs in order to be more competitive with the 48 other states that exempt manufacturing equipment from sales and use tax, and to benefit from reshoring and other economic growth opportunities.
(b)It is the intent of the Legislature to enact legislation that would improve the states sales and use tax incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development.
(c)It is the intent of the Legislature, by the amendments made by this act, to allow eligible taxpayers to substantiate qualification for manufacturing and research-and-development equipment that has a useful life of one or more years by reference to a warranty, maintenance agreement, or industry replacement standard of a duration of one or more years, beginning July 1, 2014.SEC. 2.Section 6377.1 of the Revenue and Taxation Code is amended to read:6377.1.(a)Except as provided in subdivision (e), on or after July 1, 2014, and before January 1, 2018, there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following:
(1)Qualified tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required.
(2)Qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(3)Qualified tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described in paragraph (1) or (2).
(4)Qualified tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, that will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with those processes.
(b)For purposes of this section:
(1)Fabricating means to make, build, create, produce, or assemble components or tangible personal property to work in a new or different manner.
(2)Manufacturing means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(3)Primarily means 50 percent or more of the time.
(4)Process means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5)Processing means the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property.
(6)(A)Qualified person means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.
(B)Notwithstanding subparagraph (A), qualified person shall not include either of the following:
(i)An apportioning trade or business that is required to apportion its business income pursuant to subdivision (b) of Section 25128.
(ii)A trade or business conducted wholly within this state that would be required to apportion its business income pursuant to subdivision (b) of Section 25128 if it were subject to apportionment pursuant to Section 25101.
(7)(A)Qualified tangible personal property includes, but is not limited to, all of the following:
(i)Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(ii)Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
(iii)Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
(iv)Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included.
(B)Qualified tangible personal property shall not include any of the following:
(i)Consumables with a useful life of less than one year.
(ii)Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
(iii)Tangible personal property used primarily in administration, general management, or marketing.
(8)Refining means the process of converting a natural resource to an intermediate or finished product.
(9)Research and development means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(10)On and after July 1, 2014, useful life shall be determined using any one of the following:(A)(10)Useful life for tangible personal property that is treated as having a useful life of one or more years for state income or franchise tax purposes shall be deemed to have a useful life of one or more years for purposes of this section. Useful life for tangible personal property that is treated as having a useful life of less than one or more years year for state income or franchise tax purposes shall be deemed to have a useful life of less than one year for purposes of this section.
(B)Useful life for tangible personal property that is included under a warranty by the manufacturer or other third party to last one or more years shall be treated as having a useful life of one or more years for purposes of this section.(C)Useful life for tangible personal property that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years for purposes of this section.(D)Useful life for tangible personal property that is normally replaced at intervals of one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, or is expected at the time of purchase to last one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, shall be treated as having a useful life of one or more years for purposes of this section.(c)An exemption shall not be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer retains the exemption certificate in its records and furnishes it to the board upon request.
(d)(1)Notwithstanding the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) and the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(2)Notwithstanding subdivision (a), the exemption established by this section shall not apply with respect to any tax levied pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant to Section 35 of Article XIII of the California Constitution, or any tax levied pursuant to Section 6051 or 6201 that is deposited in the State Treasury to the credit of the Local Revenue Fund 2011 pursuant to Section 6051.15 or 6201.15.
(e)(1)The exemption provided by this section shall not apply to either of the following:
(A)Any tangible personal property purchased during any calendar year that exceeds two hundred million dollars ($200,000,000) of purchases of qualified tangible personal property for which an exemption is claimed by a qualified person under this section. For purposes of this subparagraph, in the case of a qualified person that is required to be included in a combined report under Section 25101 or authorized to be included in a combined report under Section 25101.15, the aggregate of all purchases of qualified personal property for which an exemption is claimed pursuant to this section by all persons that are required or authorized to be included in a combined report shall not exceed two hundred million dollars ($200,000,000) in any calendar year.
(B)The sale or storage, use, or other consumption of property that, within one year from the date of purchase, is removed from California, converted from an exempt use under subdivision (a) to some other use not qualifying for exemption, or used in a manner not qualifying for exemption.
(2)If a purchaser certifies in writing to the seller that the tangible personal property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and the purchase exceeds the two-hundred-million-dollar ($200,000,000) limitation described in subparagraph (A) of paragraph (1), or within one year from the date of purchase, the purchaser removes that property from California, converts that property for use in a manner not qualifying for the exemption, or uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the tangible personal property at the time the tangible personal property is so purchased, removed, converted, or used, and the cost of the tangible personal property to the purchaser shall be deemed the gross receipts from that retail sale.
(f)This section shall apply to leases of qualified tangible personal property classified as continuing sales and continuing purchases in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to the lease, provided the lessee is a qualified person and the tangible personal property is used in an activity described in subdivision (a).
(g)(1)Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of exemptions that will be taken for each calendar year, or any portion thereof, for which this section provides an exemption.
(2)No later than each March 1 next following a calendar year for which this section provides an exemption, the board shall provide to the Joint Legislative Budget Committee a report of the total dollar amount of exemptions taken under this section for the immediately preceding calendar year. The report shall compare the total dollar amount of exemptions taken under this section for that calendar year with the departments estimate for that same calendar year. If that total dollar amount taken is less than the estimate for that calendar year, the report shall identify options for increasing exemptions taken so as to meet estimated amounts.
(h)This section is repealed on December 1, 2018. January 1, 2018.
SEC. 3.Section 6377.1 is added to the Revenue and Taxation Code, to read:6377.1.(a)Except as provided in subdivision (e), on or after January 1, 2018, and before July 1, 2030, 2027, there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following:
(1)Qualified tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required.
(2)Qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(3)Qualified tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described in paragraph (1) or (2).
(4)Qualified tangible personal property purchased for use by a qualified person to be used primarily in the generation, production, storage, or distribution of electric power.
(5)Qualified tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, that will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, the generation, production, storage, or distribution of electric power, or as a research or storage facility for use in connection with those processes.
(b)For purposes of this section:
(1)Fabricating means to make, build, create, produce, or assemble components or tangible personal property to work in a new or different manner.
(2)Generation, production, storage, or distribution means the activity of making, producing, creating, or converting electric power from other sources of energy, including, but not limited to, solar, wind, hydroelectric, geothermal, and biomass, storing that energy, and delivering, but not transmitting, electric power to consumers.
(3)Manufacturing means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(4)Primarily means 50 percent or more of the time.
(5)Process means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(6)Processing means the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property.
(7)(A)Qualified person means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 22111 to 221118, inclusive, 221122, 541711, and or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.
(B)(i)Notwithstanding subparagraph (A), qualified person shall not include either of the following:
(I)An apportioning trade or business that is required to apportion its business income pursuant to subdivision (b) of Section 25128.
(II)A trade or business conducted wholly within this state that would be required to apportion its business income pursuant to subdivision (b) of Section 25128 if it were subject to apportionment pursuant to Section 25101.
(ii)This subparagraph shall not apply to a qualified person described in subparagraph (A) that is also engaged in an agricultural business activity described in paragraph (2) of subdivision (d) of Section 25128.
(8)(A)Qualified tangible personal property includes, but is not limited to, all of the following:
(i)Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(ii)Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
(iii)Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
(iv)Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes, or the generation, production, storage, or distribution of electric power. Buildings used solely for warehousing purposes after completion of those processes are not included.
(B)Qualified tangible personal property shall not include any of the following:
(i)Consumables with a useful life of less than one year.
(ii)Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
(iii)Tangible personal property used primarily in administration, general management, or marketing.
(9)Refining means the process of converting a natural resource to an intermediate or finished product.
(10)Research and development means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(11)Useful life shall be determined using any one of the following:
(A)Useful life for tangible personal property that is treated as having a useful life of one or more years for state income or franchise tax purposes shall be treated as having a useful life of one or more years for purposes of this section.
(B)Useful life for tangible personal property that is included under a warranty by the manufacturer or other third party to last one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(C)Useful life for tangible personal property that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(D)Useful life for tangible personal property that is normally replaced at intervals of one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, or is expected at the time of purchase to last one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, shall be treated as having a useful life of one or more years for purposes of this section.
(c)An exemption shall not be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer retains the exemption certificate in its records and furnishes it to the board upon request.
(d)(1)Notwithstanding the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) and the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(2)Notwithstanding subdivision (a), the exemption established by this section shall not apply with respect to any tax levied pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant to Section 35 of Article XIII of the California Constitution, or any tax levied pursuant to Section 6051 or 6201 that is deposited in the State Treasury to the credit of the Local Revenue Fund 2011 pursuant to Section 6051.15 or 6201.15.
(e)(1)The exemption provided by this section shall not apply to either of the following:
(A)Any tangible personal property purchased during any calendar year that exceeds two hundred million dollars ($200,000,000) of purchases of qualified tangible personal property for which an exemption is claimed by a qualified person under this section. For purposes of this subparagraph, in the case of a qualified person that is required to be included in a combined report under Section 25101 or authorized to be included in a combined report under Section 25101.15, the aggregate of all purchases of qualified personal property for which an exemption is claimed pursuant to this section by all persons that are required or authorized to be included in a combined report shall not exceed two hundred million dollars ($200,000,000) in any calendar year.
(B)The sale or storage, use, or other consumption of property that, within one year from the date of purchase, is removed from California, converted from an exempt use under subdivision (a) to some other use not qualifying for exemption, or used in a manner not qualifying for exemption.
(2)If a purchaser certifies in writing to the seller that the tangible personal property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and the purchase exceeds the two-hundred-million-dollar ($200,000,000) limitation described in subparagraph (A) of paragraph (1), or within one year from the date of purchase, the purchaser removes that property from California, converts that property for use in a manner not qualifying for the exemption, or uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the tangible personal property at the time the tangible personal property is so purchased, removed, converted, or used, and the cost of the tangible personal property to the purchaser shall be deemed the gross receipts from that retail sale.
(f)This section shall apply to leases of qualified tangible personal property classified as continuing sales and continuing purchases in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to the lease, provided the lessee is a qualified person and the tangible personal property is used in an activity described in subdivision (a).
(g)(1)Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of exemptions that will be taken for each calendar year, or any portion thereof, for which this section provides an exemption.
(2)No later than each March 1 next following a calendar year for which this section provides an exemption, the board shall provide to the Joint Legislative Budget Committee a report of the total dollar amount of exemptions taken under this section for the immediately preceding calendar year. The report shall compare the total dollar amount of exemptions taken under this section for that calendar year with the departments estimate for that same calendar year. If that total dollar amount taken is less than the estimate for that calendar year, the report shall identify options for increasing exemptions taken so as to meet estimated amounts.
(h)This section is repealed on January 1, 2031. 2028.
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.
(a)The Legislature finds and declares all of the following:
(a)(1)In 2013, California enacted a partial sales and use tax exemption for manufacturing and research-and-development equipment to encourage capital investments and job creation creation, and to make California more competitive in attracting new businesses and expansions of existing businesses.
(b)(2)According to the 2015 Reshoring Initiative, Initiative Data Report, the United States of America has brought approximately 130,000 manufacturing jobs back from other countries between 2010 and 2015. However, the report also shows that California only attracted 1,479 of those reshored jobs, meaning that California missed out on the opportunity to grow its manufacturing sector and create more high-paying middle-class jobs.
(c)(3)The manufacturing sector is important for the long-term health of Californias economy and middle-class growth potential with an average annual wage of $83,000 and the multiplier effect that results in approximately 2.5 jobs created for every manufacturing job created.
(d)(4)California must take steps now to create an investment environment that attracts more manufacturing and research-and-development jobs in order to be more competitive with the 48 other states that exempt manufacturing equipment from sales and use taxes, tax, and to benefit from reshoring and other economic growth opportunities.
(b)It is the intent of the Legislature to enact legislation that would improve the states sales and use tax incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development.
(c)It is the intent of the Legislature, by the amendments made by this act, to allow eligible taxpayers to substantiate qualification for manufacturing and research-and-development equipment that has a useful life of one or more years by reference to a warranty, maintenance agreement, or industry replacement standard of a duration of one or more years, beginning July 1, 2014.
SEC. 2.It is the intent of the Legislature to improve the states manufacturing incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development.SEC. 2.Section 6377.1 of the Revenue and Taxation Code is amended to read:6377.1.(a)Except as provided in subdivision (e), on or after July 1, 2014, and before July 1, 2022, January 1, 2018, there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following:
(1)Qualified tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required.
(2)Qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(3)Qualified tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described in paragraph (1) or (2).
(4)Qualified tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, that will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with those processes.
(b)For purposes of this section:
(1)Fabricating means to make, build, create, produce, or assemble components or tangible personal property to work in a new or different manner.
(2)Manufacturing means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(3)Primarily means 50 percent or more of the time.
(4)Process means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5)Processing means the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property.
(6)(A)Qualified person means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.
(B)Notwithstanding subparagraph (A), qualified person shall not include either of the following:
(i)An apportioning trade or business that is required to apportion its business income pursuant to subdivision (b) of Section 25128.
(ii)A trade or business conducted wholly within this state that would be required to apportion its business income pursuant to subdivision (b) of Section 25128 if it were subject to apportionment pursuant to Section 25101.
(7)(A)Qualified tangible personal property includes, but is not limited to, all of the following:
(i)Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(ii)Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
(iii)Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
(iv)Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included.
(B)Qualified tangible personal property shall not include any of the following:
(i)Consumables with a useful life of less than one year.
(ii)Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
(iii)Tangible personal property used primarily in administration, general management, or marketing.
(8)Refining means the process of converting a natural resource to an intermediate or finished product.
(9)Research and development means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(10)On and after July 1, 2014, useful life shall be determined using any one of the following:
(10)(A)Useful life for tangible personal property that is treated as having a useful life of one or more years for state income or franchise tax purposes shall be deemed to have treated as having a useful life of one or more years for purposes of this section. Useful life for tangible personal property that is treated as having a useful life of less than one year for state income or franchise tax purposes shall be deemed to have a useful life of less than one year for purposes of this section.
(B)Useful life for tangible personal property that is included under a warranty by the manufacturer or other third party to last one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(C)Useful life for tangible personal property that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(D)Useful life for tangible personal property that is normally replaced at intervals of one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, or is expected at the time of purchase to last one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, shall be treated as having a useful life of one or more years for purposes of this section.
(c)An exemption shall not be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer retains the exemption certificate in its records and furnishes it to the board upon request.
(d)(1)Notwithstanding the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) and the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(2)Notwithstanding subdivision (a), the exemption established by this section shall not apply with respect to any tax levied pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant to Section 35 of Article XIII of the California Constitution, or any tax levied pursuant to Section 6051 or 6201 that is deposited in the State Treasury to the credit of the Local Revenue Fund 2011 pursuant to Section 6051.15 or 6201.15.
(e)(1)The exemption provided by this section shall not apply to either of the following:
(A)Any tangible personal property purchased during any calendar year that exceeds two hundred million dollars ($200,000,000) of purchases of qualified tangible personal property for which an exemption is claimed by a qualified person under this section. For purposes of this subparagraph, in the case of a qualified person that is required to be included in a combined report under Section 25101 or authorized to be included in a combined report under Section 25101.15, the aggregate of all purchases of qualified personal property for which an exemption is claimed pursuant to this section by all persons that are required or authorized to be included in a combined report shall not exceed two hundred million dollars ($200,000,000) in any calendar year.
(B)The sale or storage, use, or other consumption of property that, within one year from the date of purchase, is removed from California, converted from an exempt use under subdivision (a) to some other use not qualifying for exemption, or used in a manner not qualifying for exemption.
(2)If a purchaser certifies in writing to the seller that the tangible personal property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and the purchase exceeds the two-hundred-million-dollar ($200,000,000) limitation described in subparagraph (A) of paragraph (1), or within one year from the date of purchase, the purchaser removes that property from California, converts that property for use in a manner not qualifying for the exemption, or uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the tangible personal property at the time the tangible personal property is so purchased, removed, converted, or used, and the cost of the tangible personal property to the purchaser shall be deemed the gross receipts from that retail sale.
(f)This section shall apply to leases of qualified tangible personal property classified as continuing sales and continuing purchases in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to the lease, provided the lessee is a qualified person and the tangible personal property is used in an activity described in subdivision (a).
(g)(1)Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of exemptions that will be taken for each calendar year, or any portion thereof, for which this section provides an exemption.
(2)No later than each March 1 next following a calendar year for which this section provides an exemption, the board shall provide to the Joint Legislative Budget Committee a report of the total dollar amount of exemptions taken under this section for the immediately preceding calendar year. The report shall compare the total dollar amount of exemptions taken under this section for that calendar year with the departments estimate for that same calendar year. If that total dollar amount taken is less than the estimate for that calendar year, the report shall identify options for increasing exemptions taken so as to meet estimated amounts.
(h)This section is repealed on January 1, 2023. December 1, 2018.
SEC. 3.Section 6377.1 is added to the Revenue and Taxation Code, to read:6377.1.(a)Except as provided in subdivision (e), on or after January 1, 2018, and before July 1, 2030, there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following:
(1)Qualified tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered tangible personal property to its completed form, including packaging, if required.
(2)Qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(3)Qualified tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described in paragraph (1) or (2).
(4)Qualified tangible personal property purchased for use by a qualified person to be used primarily in the generation, production, storage, or distribution of electric power.
(5)Qualified tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, that will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, the generation, production, storage, or distribution of electric power, or as a research or storage facility for use in connection with those processes.
(b)For purposes of this section:
(1)Fabricating means to make, build, create, produce, or assemble components or tangible personal property to work in a new or different manner.
(2)Generation, production, storage, or distribution means the activity of making, producing, creating, or converting electric power from other sources of energy, including, but not limited to, solar, wind, hydroelectric, geothermal, and biomass, storing that energy, and delivering, but not transmitting, electric power to consumers.
(3)Manufacturing means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(4)Primarily means 50 percent or more of the time.
(5)Process means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified persons manufacturing, processing, refining, fabricating, or recycling activity is conducted shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(6)Processing means the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property.
(7)(A)Qualified person means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 22111 to 221118, inclusive, 221122, 541711, and 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.
(B)(i)Notwithstanding subparagraph (A), qualified person shall not include either of the following:
(I)An apportioning trade or business that is required to apportion its business income pursuant to subdivision (b) of Section 25128.
(II)A trade or business conducted wholly within this state that would be required to apportion its business income pursuant to subdivision (b) of Section 25128 if it were subject to apportionment pursuant to Section 25101.
(ii)This subparagraph shall not apply to a qualified person described in subparagraph (A) that is also engaged in an agricultural business activity described in paragraph (2) of subdivision (d) of Section 25128.
(8)(A)Qualified tangible personal property includes, but is not limited to, all of the following:
(i)Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(ii)Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
(iii)Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
(iv)Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes, or the generation, production, storage, or distribution of electric power. Buildings used solely for warehousing purposes after completion of those processes are not included.
(B)Qualified tangible personal property shall not include any of the following:
(i)Consumables with a useful life of less than one year.
(ii)Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
(iii)Tangible personal property used primarily in administration, general management, or marketing.
(9)Refining means the process of converting a natural resource to an intermediate or finished product.
(10)Research and development means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(11)Useful life shall be determined using any one of the following:
(A)Useful life for tangible personal property that is treated as having a useful life of one or more years for state income or franchise tax purposes shall be treated as having a useful life of one or more years for purposes of this section.
(B)Useful life for tangible personal property that is included under a warranty by the manufacturer or other third party to last one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(C)Useful life for tangible personal property that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years for purposes of this section.
(D)Useful life for tangible personal property that is normally replaced at intervals of one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, or is expected at the time of purchase to last one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, shall be treated as having a useful life of one or more years for purposes of this section.
(c)An exemption shall not be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer retains the exemption certificate in its records and furnishes it to the board upon request.
(d)(1)Notwithstanding the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) and the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(2)Notwithstanding subdivision (a), the exemption established by this section shall not apply with respect to any tax levied pursuant to Section 6051.2, 6051.5, 6201.2, or 6201.5, pursuant to Section 35 of Article XIII of the California Constitution, or any tax levied pursuant to Section 6051 or 6201 that is deposited in the State Treasury to the credit of the Local Revenue Fund 2011 pursuant to Section 6051.15 or 6201.15.
(e)(1)The exemption provided by this section shall not apply to either of the following:
(A)Any tangible personal property purchased during any calendar year that exceeds two hundred million dollars ($200,000,000) of purchases of qualified tangible personal property for which an exemption is claimed by a qualified person under this section. For purposes of this subparagraph, in the case of a qualified person that is required to be included in a combined report under Section 25101 or authorized to be included in a combined report under Section 25101.15, the aggregate of all purchases of qualified personal property for which an exemption is claimed pursuant to this section by all persons that are required or authorized to be included in a combined report shall not exceed two hundred million dollars ($200,000,000) in any calendar year.
(B)The sale or storage, use, or other consumption of property that, within one year from the date of purchase, is removed from California, converted from an exempt use under subdivision (a) to some other use not qualifying for exemption, or used in a manner not qualifying for exemption.
(2)If a purchaser certifies in writing to the seller that the tangible personal property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and the purchase exceeds the two-hundred-million-dollar ($200,000,000) limitation described in subparagraph (A) of paragraph (1), or within one year from the date of purchase, the purchaser removes that property from California, converts that property for use in a manner not qualifying for the exemption, or uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the tangible personal property at the time the tangible personal property is so purchased, removed, converted, or used, and the cost of the tangible personal property to the purchaser shall be deemed the gross receipts from that retail sale.
(f)This section shall apply to leases of qualified tangible personal property classified as continuing sales and continuing purchases in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to the lease, provided the lessee is a qualified person and the tangible personal property is used in an activity described in subdivision (a).
(g)(1)Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of exemptions that will be taken for each calendar year, or any portion thereof, for which this section provides an exemption.
(2)No later than each March 1 next following a calendar year for which this section provides an exemption, the board shall provide to the Joint Legislative Budget Committee a report of the total dollar amount of exemptions taken under this section for the immediately preceding calendar year. The report shall compare the total dollar amount of exemptions taken under this section for that calendar year with the departments estimate for that same calendar year. If that total dollar amount taken is less than the estimate for that calendar year, the report shall identify options for increasing exemptions taken so as to meet estimated amounts.
(h)This section is repealed on January 1, 2031.
The Legislature finds and declares all of the following:
(a)In 2013, California enacted a partial sales and use tax exemption for manufacturing and research-and-development equipment to encourage capital investments and job creation and to make California more competitive in attracting new businesses and expansions of existing businesses.
(b)According to the Reshoring Initiative, the United States of America has brought approximately 130,000 manufacturing jobs back from other countries between 2010 and 2015. However, the report also shows that California only attracted 1,479 of those reshored jobs, meaning that California missed out on the opportunity to grow its manufacturing sector and create more high-paying middle-class jobs.
(c)The manufacturing sector is important for the long-term health of Californias economy and middle-class growth potential with an average annual wage of $83,000 and the multiplier effect that results in approximately 2.5 jobs created for every manufacturing job created.
(d)California must take steps now to create an investment environment that attracts more manufacturing and research-and-development jobs in order to be more competitive with the 48 other states that exempt manufacturing equipment from sales and use taxes, and to benefit from reshoring and other economic growth opportunities.
SEC. 2.It is the intent of the Legislature to improve the states manufacturing incentives to promote a stronger California economy by securing a greater share of the high-paying, high-skilled jobs in manufacturing and research and development.
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Date
|
Status
|
|---|---|
| Feb 1, 2018 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
| Jan 31, 2018 | Died pursuant to Art. IV, Sec. 10(c) of the Constitution. |
| May 26, 2017 | In committee: Held under submission. |
| May 10, 2017 | In committee: Set, first hearing. Referred to APPR. suspense file. |
| May 3, 2017 | Re-referred to Com. on APPR. |
| May 2, 2017 | Read second time and amended. |
| May 1, 2017 | From committee: Amend, and do pass as amended and re-refer to Com. on APPR. (Ayes 10. Noes 0.) (April 24). |
| Apr 4, 2017 | Re-referred to Com. on REV. & TAX. |
| Apr 3, 2017 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| Mar 30, 2017 | Referred to Com. on REV. & TAX. |
| Feb 15, 2017 | From printer. May be heard in committee March 17. |
| Feb 14, 2017 | Read first time. To print. |
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Date
|
Description
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Location
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Votes
|
|
|---|---|---|---|---|
| Apr 24, 2017 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Revenue and Taxation |
Passed |
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.
|
Organization
|
Position
|
Date
|
|---|---|---|
| Advanced Medical Technology Association | ** Support | Apr 21, 2017 |
| Air Logistics Corporation | ** Support | Apr 21, 2017 |
| Air Spray USA Inc. | ** Support | Apr 21, 2017 |
| Biocom | ** Support | Apr 21, 2017 |
| Calaveras County Taxpayers Association | ** Support | Apr 21, 2017 |
| California Business Properties Association | ** Support | Apr 21, 2017 |
| California Cannabis Industry Association | ** Support | Apr 21, 2017 |
| California Chamber Of Commerce | * Support | Apr 25, 2017 |
| California Construction And Industrial Materials Association | ** Support | Apr 21, 2017 |
| California Farm Bureau Federation | ** Support | Apr 21, 2017 |
| California League of Food Processors | ** Support | Apr 21, 2017 |
| California Life Sciences Association | ** Support | Apr 21, 2017 |
| california manufacturer's & technology association | ** Support | Apr 21, 2017 |
| California Manufacturers & Technology Association | ** Support | Apr 21, 2017 |
| California Manufacturers And Technology Association | ** Support | Apr 21, 2017 |
| California Metals Coalition | ** Support | Apr 21, 2017 |
| California Steel Industries, Inc. | ** Support | Apr 21, 2017 |
| California Taxpayers' Association | * Indeterminate | Apr 25, 2017 |
| CannaCraft | ** Support | Apr 21, 2017 |
| Caterpillar | ** Support | Apr 21, 2017 |
| Chevron | ** Support | Apr 21, 2017 |
| Computing Technology Industry Association | ** Support | Apr 21, 2017 |
| Council on State Taxation | ** Support | Apr 21, 2017 |
| County of San Bernardino | ** Support | Apr 21, 2017 |
| Critical Solutions | ** Support | Apr 21, 2017 |
| Dart Container Corporation | ** Support | Apr 21, 2017 |
| Dow Chemical Company, The | ** Support | Apr 21, 2017 |
| General Mills Inc. | ** Support | Apr 21, 2017 |
| Granite Construction | ** Support | Apr 21, 2017 |
| Graphic Packaging International Inc. | ** Support | Apr 21, 2017 |
| Grow Manufacturing Initiative | ** Support | Apr 21, 2017 |
| Hogan Manufacturing, Inc. | ** Support | Apr 21, 2017 |
| Industrial Association of Contra Costa County | ** Support | Apr 21, 2017 |
| Industrial Environmental Association | ** Support | Apr 21, 2017 |
| Intel Corporation | ** Support | Apr 21, 2017 |
| Kern County Taxpayers Association | ** Support | Apr 21, 2017 |
| Lockheed Martin | ** Support | Apr 21, 2017 |
| manufacturer's council of the central valley | ** Support | Apr 21, 2017 |
| Manufacturers Council of the Central Valley | ** Support | Apr 21, 2017 |
| National Federation Of Independent Business | ** Support | Apr 21, 2017 |
| Northern Rural Training and Employment Consortium | ** Support | Apr 21, 2017 |
| Orange County Business Council | ** Support | Apr 21, 2017 |
| Pacific Gas & Electric | ** Support | Apr 21, 2017 |
| Pasadena Chamber of Commerce | ** Support | Apr 21, 2017 |
| Plastics Industry Association | ** Support | Apr 21, 2017 |
| San Bernardino County Board of Supervisors | * Indeterminate | Apr 25, 2017 |
| San Gabriel Valley Economic Partnership | ** Support | Apr 21, 2017 |
| Searles Valley Minerals | ** Support | Apr 21, 2017 |
| Solano County Taxpayers Association | ** Support | Apr 21, 2017 |
| Solar Turbines | ** Support | Apr 21, 2017 |
| Sonoma Lab Works | ** Support | Apr 21, 2017 |
| Teichert Construction | ** Support | Apr 21, 2017 |
| The Wonderful Company | ** Support | Apr 21, 2017 |
| Transfer Flow, Inc. | ** Support | Apr 21, 2017 |
| Weiss McNair, LLC | ** Support | Apr 21, 2017 |
| Western Growers Association | ** Support | Apr 21, 2017 |
Date of Hearing: May 10, 2017
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez Fletcher, Chair
ABPCA Bill Id:AB 600
Author:(Cooper) – As Amended Ver:May 2, 2017
Policy Committee: | Revenue and Taxation | Vote: | 10 - 0 |
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Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill modifies the manufacturer’s partial sales tax exemption (Exemption) by expanding eligibility to certain agricultural businesses as well as to those engaged in electric power generation or distribution. The bill also modifies the definition of “useful life” for the purposes of determining eligible property purchases subject to the Exemption, and extends the sunset of the Exemption from July 1, 2022 to July 1, 2027.
FISCAL EFFECT:
- Annual General Fund (GF) revenue loss of approximately $88.5 million as a result of expanded eligibly for the Exemption related to electric power generation and agricultural businesses.
- Unknown impact on GF revenue loss due to the expanded definition of “useful life” for the purposes of determining eligible tangible personal property purchases.
- Unknown and possibly significant administrative costs for the Board of Equalization (BOE) to implement the provisions of this bill.
COMMENTS:
- Background. AB 93 (Committee on Budget), Chapter 69, Statutes of 2014, among other things created the Exemption. The Exemption applies to the GF portion of the SUT (3.9375%) on purchases of tangible personal property, such as machinery and equipment, used for research and development in manufacturing activities. One restriction of the Exemption is that any property treated as having a “useful life” of less than one year is not eligible.
Since the creation of the Exemption, the expected revenue loss has been far below expectations. According to the Legislative Analyst’s Office (LAO), the revenue loss has been about a third of what was anticipated.
- Purpose. According to the author, AB 600 will remove ambiguities associated with Exemption that has made it less effective and less attractive to employers. This bill makes the following changes to the Exemption:
- It redefines “useful life” for the purposes to determining eligible purchases of property. Under the existing definition, the same product being used in the same manner may have disparate treatment depending on whether the taxpayer expenses or depreciates the property. This bill expands the definition of “useful life” to include warranties, maintenance contracts, and actual businesses practices and personal experiences as factors when determining if the property has a useful life of more than one year. These changes are meant to expand the universe of eligible property subject to the exemption.
- It expands eligible manufactures to include food manufacturers, who were previously excluded from the program due to cost concerns, and expands qualified property to include property used in the generation, production, storage, or distribution of electric power.
- Too Soon? GO-Biz has provided the following statement with respect to any changes made to the CCTC, the New Employment Credit, and the Partial Sales and Use Tax Exemption:
“Due to the uncertainty of potential federal policy changes and any corresponding impacts to the economy, as well as potential future state budget constraints, the Administration is not pursuing modifications to the California Competes Tax Credit, the New Employment Tax Credit, or the Partial Sales and Use Tax Exemption at this time. These incentives will continue to be available under current law for FY 17/18, and in the case of the New Employment Tax Credit and the Partial Sales and Use Tax Exemption, for the next several years.”
Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081
Date of Hearing: April 24, 2017
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
ABPCA Bill Id:AB 600 (
Author:Cooper) – As Amended Ver:April 3, 2017
Majority vote. Fiscal committee.
SUBJECT: Sales and use taxes: exemption: manufacturing and research: useful life: electric power generation
SUMMARY: Modifies the existing manufacturer’s partial Sales and Use Tax (SUT) exemption by retroactively expanding the definition of “useful life,” broadening the scope of eligible individuals and tangible personal property (TPP), and extending the sunset date from January 1, 2018, to January 1, 2031. Specifically, this bill:
- Defines “useful life,” beginning on or after January 1, 2014, as one of the following:
- TPP with a useful life of one or more years if it is treated as having a useful life of one or more years for state income tax or franchise tax purposes;
- TPP that is included under a warranty by the manufacturer or other third party to last one or more years shall be treated as having a useful life of one or more years for purposes of this exemption;
- TPP that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years for purposes of this exemption; and,
- TPP that is normally replaced at intervals of one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, or is expected at the time of purchase to last one or more years, as established by industry or business practices or based on the actual experience of the person claiming the exemption, shall be treated as having a useful life of one or more years for purposes of this section.
- Eliminates the requirement that TPP be treated as having a “useful life” of less than one year for purposes of the partial SUT exemption if the TPP is considered to have a “useful life” of less than one year for state income tax or franchise tax purposes.
- Expands the partial SUT exemption to qualified TPP purchased by a qualified person to be used primarily in the generation, production, storage, or distribution of electric power.
- Defines “Generation, production, storage, or distribution” as the activity of making, producing, creating, or converting electric power from other sources of energy, including, but not limited to, solar, wind, hydroelectric, geothermal, and biomass, storing that energy, and delivering, but not transmitting, electric power to consumers.
- Expands the definition of a “qualified person” to include persons primarily engaged in those lines of businesses described in the North American Industry Classification System[1] Codes 22111 through 221118, and 221122[2].
- Provides that certain agricultural business activity required to apportion income is no longer precluded from qualifying for a partial SUT exemption.
- Makes finding and declarations related to manufacturing jobs in California.
EXISTING LAW:
- Requires the BOE to provide to the Joint Legislative Budget Committee a report of the total dollar amount of exemptions taken under the manufacturer’s partial SUT exemption for the immediately preceding calendar year. The report shall compare those revenue losses to the projections estimated at the time of this program’s enactment.
- Creates the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) for the purpose of promoting the development and utilization of alternative energy sources and the development and commercialization of advanced transportation technologies.
- Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, or are needed to develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
- Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used for the "design, manufacture, production, or assembly" of either advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined. The project must demonstrate that the benefits to the state from the project equals or exceed the projected benefit to the participating party from the SUT exclusion.
- Provides, beginning July 1, 2014 until July 1, 2022, a 3.9375% state General Fund SUT exemption for a qualified person’s qualified TPP purchase, such as machinery and equipment purchased for use primarily in research and development or manufacturing activities. The partial exemption is limited to “qualified tangible personal property.” Consumables that are treated as having a useful life of less than one year for state income or franchise tax purposes are excluded from this term.
- Excludes the following lines of business from qualifying for the partial SUT exemption:
- An apportioning trade or business that is required to apportion its business income pursuant to specified income tax provisions; or,
- A trade or business conducted wholly within this state that would be required to apportion its business income if it were subject to apportionment pursuant to specified income tax provisions.
- Provides that the partial SUT exemption does not apply to purchases of any qualified TPP that exceeds $200 million, which a qualified person purchased during any calendar year for which the exemption is claimed.
FISCAL EFFECT: The BOE estimates General Fund losses of $43.1 million in fiscal year (FY) 2017-18, and $88.5 million in FY 2018-19. The BOE did not provide an estimate for the expanded definition of “useful life.”
COMMENTS:
- The author has included the following statement in support of this bill:
The California Manufacturing/R&D tax incentive program was created in 2013 as part of the Governor’s Economic Development Initiative (GEDI) to retain and attract manufacturing and research-and-development jobs and investment.
This program is one of three GEDI incentives that were intended to constitute a revenue-neutral replacement of the Enterprise Zones. However, problems associated with ambiguities and eligibility restrictions have rendered the Program less effective and less attractive to employers, and have kept the program from achieving its revenue-neutral targets.
This measure addresses these issues to stimulate economic activity, and position California to compete for the manufacturing jobs that address income inequality and rebuild the path to the middle-class. Furthermore, it would grow our economy to provide a robust revenue source for our schools, roads and critical public services.
- Supporters state “[t]he governor’s Renewable Portfolio Standards (RPS) require that at least 50 percent of retail sales of electricity by utilities be derived from renewable energy by the year 2030. While energy producers are working to meet that goal, California’s electricity prices (already among the highest in the nation) are anticipated to rise – due to higher renewable-sourced production costs versus non-renewable; numerous state mandates (e.g., clean energy research, energy efficiency mandates, etc.); and fixed grid costs that are spread over fewer units sold as ratepayers move toward solar rooftops and adopt energy conservation measures.” Providing a sales tax exemption for specified electricity production can make electricity more affordable and potentially help meet renewable energy requirements ahead of 2030.
- Committee Staff Comments:
- Background: The partial sales tax exemption was created by AB 93 (Committee on Budget), Chapter 69, Statutes of 2013, as amended by SB 90 (Galgiani), Chapter 70, Statutes of 2013. The law, in general, repealed the tax incentives for geographically targeted economic development areas and replaced them with three new incentives: a New Employment Credit, a California Competes Tax Credit (CCTC), and a Manufacturing and Research Development Partial SUT Exemption. The partial SUT exemption applies to certain sales and purchases of manufacturing and research and development equipment. The partial SUT exemption applies to qualifying sales and purchases made on or after July 1, 2014, and before July 1, 2022.
- Too soon? The Governor’s Office has provided the following statement with respect to any changes made to the New Employment Credit, the CCTC, and the Partial SUT Exemption:
Due to the uncertainty of potential federal policy changes and any corresponding impacts to the economy, as well as potential future state budget constraints, the Administration is not pursuing modifications to the California Competes Tax Credit, the New Employment Tax Credit, or the Partial Sales and Use Tax Exemption at this time. These incentives will continue to be available under current law for FY 17/18, and in the case of the New Employment Tax Credit and the Partial Sales and Use Tax Exemption, for the next several years.
In light of the position taken by the Governor’s Office, the changes outlined in this bill may be premature.
- Partial SUT exemption: The rationale for providing a SUT exemption on business inputs, even if partial, is to reduce the imposition of a tax on a tax, otherwise known as "pyramiding". The SUT is paid when a business is considered to be the final consumer of a tangible item. The tax paid on that tangible item is then incorporated into the cost of a consumer product, leading to double taxation. As noted by Joseph Henchman, “Ideally, a sales tax should be levied on all goods and services sold at retail, and to prevent distortions and hidden taxes, it should be levied only once on each good or service sold at retail.[3]” Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services that are provided by a single company instead of those that require multiple production steps[4].
- What is the problem? Concerns have been raised with respect to the current revenue loss associated with the partial SUT exemption. When first established, BOE estimated that the partial SUT exemption would result in an annual revenue loss of $637 million in fiscal year FY 2014-15 and $681 million in FY 2015-16. The elimination of California Enterprise Zone in exchange for the three new tax incentive programs was expected to be a revenue neutral change. However, actual revenue losses have not matched expectations. According to the Legislative Analysts’ Office (LAO), the current estimates for 2016 ($165 million) are about one-third as large as the administration projected three years ago, when the exemption was created. When the total amount of exemptions falls below estimates, the BOE is required to provide options to increase the exemptions to meet the estimated amounts. The BOE outlined the following options:
- Providing businesses with more options for demonstrating that the equipment they purchase is eligible for the exemption;
- Increasing the cap on the amount of eligible equipment that a single business can claim. The cap is currently $200 million per year. At current tax rates, a business that buys $200 million of eligible equipment would be eligible for a sales tax exemption of about $8 million; and,
- Expanding the set of businesses that are eligible to claim the exemption.
This bill adopts two of those recommendations: it expands the definition of “useful life” and expands the SUT exemption to manufacturing related to electric power generation and food manufacturers.
- Existing definition of “useful life”: Existing law provides that if a taxpayer treats TPP as having a “useful life” of less than one year for state income or franchise tax purposes, it is treated as having a “useful life” of less than one year for purposes of the partial SUT exemption. Additionally, TPP that is treated as having a “useful life” of more than one year for income tax purposes is also treated as having a “useful life” of more than one year for the partial SUT exemption. The BOE has interpreted this to mean that if the item is expensed (meaning that the entire cost of the TPP is charged in the first year), it does not qualify for the partial exemption[5]. This definition has created situations where the same product being used in the same manner may have disparate treatment depending on whether the taxpayer expenses or depreciates the property. As an example, if a taxpayer has purchased a large machine and has capitalized the purchase and is depreciating the asset for income tax purposes, the purchase of the machine may qualify for the partial SUT exemption. If a different taxpayer purchases the same machine and due to administrative costs is unable to capitalize and depreciate the machine, the machine will not qualify for the partial exemption.[6]
- Proposed changes to “useful life”: This bill expands the definition of “useful life” by including warranties, maintenance contracts, actual business practices and personal experiences as factors when determining whether TPP has an actual useful life of more than one year. This new definition is a serious departure from the previous definition, which not only included a definition of when TPP has a “useful life” of more than one year, but also included a clear definition of when TPP has a useful life of less than one year. By removing the second part of the definition, this bill does away with the bright line test. In response to this bill, businesses may decide to provide warranties and maintenance contracts of one year to ensure that their items qualify for the partial SUT exemption because products with maintenance contracts and warranties of one year are automatically less expensive. Concerns have also been raised by BOE staff, noting that “the proposed “normal” replacement time test is not well-defined and could lead to future tax disputes.” To reduce the possibility of future litigation and to give businesses greater certainty as to which items qualify under the partial SUT exemption, the Committee may wish to maintain a bright line test for determining when TPP does not qualify for the exemption.
- Food manufacturers: This bill addresses situations where an otherwise qualifying food manufacturer does not qualify for the partial SUT exemption for their manufacturing equipment because they derive more than 50% of their “gross business receipts” from “agricultural business activities.” According to the supporters of this bill, these agricultural manufacturers were excluded from the partial SUT exemption because the cost was expected to exceed revenue neutrality. Given that costs have fallen far short of estimates, supporters think that it is appropriate to include agricultural manufacturers in order to achieve revenue neutrality.
- More green power: California authorizes the Cap-n-Trade program, imposes taxes on gasoline[7], and provides several subsidizes and financing mechanisms to encourage the production of renewable energy. Specifically, the CAEATFA provides an exclusion from both the state and local portion of the SUT for equipment used to manufacture alternative source manufacturing projects. The Property Assessed Clean Energy program promotes very aggressive financing mechanism for energy efficiency upgrades or renewable energy installations for residential, commercial and industrial property owners. Homeowners can even obtain property tax exclusions for new construction from the installation of active solar energy systems. The state has clearly made it a priority to promote and encourage the production of renewable energy.
In addition to these incentives, California also mandates that retail sellers and publicly owned utilities procure 50% of their electricity from eligible renewable energy resources by 2030. Supporters of this bill state that this bill would allow those covered entities to meet the 2030 goal. However, California does not generally subsidize behavior that it has already mandated. Subsidies are generally used to encourage new behavior, not to pay for things that are already required by law. The Committee may wish to consider whether it is appropriate to subsidize behavior that is required to be performed by law.
- Inventive or reward? Generally, tax incentives are provided as a matter of legislative grace to encourage socially beneficial behavior that likely would not occur absent a financial incentive. This bill retroactively (from July 1, 2014) expands the “useful life” definition for TPP, providing an exemption for purchases that had already taken place before the bill’s enactment. The Committee may wish to consider making the provisions of this bill prospective.
BOE staff also raises administrative concerns with the retroactive provision of this bill. Specifically, staff notes in their analysis that refund claims made for purchases in prior years would have to be made by the retailer. For very large retailers, this could pose a significant administrative burden.
REGISTERED SUPPORT / OPPOSITION:
Support
California Manufacturer’s & Technology Association (Co-Sponsor)
Advanced Medical Technology Association
Air Logistics Corporation
Air Spray USA Inc.
Biocom
Calaveras County Taxpayers Association
California Business Properties Association
California Cannabis Industry Association
California Chamber of Commerce
California Construction and Industrial Materials Association
California Farm Bureau Federation
California League of Food Processors
California Life Sciences Association
California Manufacturers and Technology Association
California Metals Coalition
California Steel Industries, Inc.
California Taxpayers Association
CannaCraft
Caterpillar
Chevron
Computing Technology Industry Association
Council on State Taxation
County of San Bernardino
Critical Solutions
Dart Container Corporation
Dow Chemical Company, The
General Mills Inc.
Granite Construction
Graphic Packaging International Inc.
Grow Manufacturing Initiative
Hogan Manufacturing, Inc.
Industrial Association of Contra Costa County
Industrial Environmental Association
Intel Corporation
Kern County Taxpayers Association
Kimberly-Clark Corporation
Lockheed Martin
Manufacturer’s Council of the Central Valley
National Federation of Independent Business
Northern Rural Training and Employment Consortium
Orange County Business Council
Pacific Gas & Electric
Pasadena Chamber of Commerce
Plastics Industry Association
Roplast Industries, Inc.
San Gabriel Valley Economic Partnership
Searles Valley Minerals
Solano County Taxpayers Association
Solar Turbines
Sonoma Lab Works
Teichert Construction
Transfer Flow, Inc.
Weiss McNair, LLC
Western Growers Association
The Wonderful Company
Opposition
None on file
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098
United States Office of Management and Budget, 2012. ↑
These lines of business include: electric power generation, hydroelectric power generation, fossil fuel electric power generation, nuclear electric power generation, solar electric power generation, wind electric power generation, geothermal electric power generation, biomass electric power generation, other electric power generation, and electric power distribution. ↑
Joseph Henchman, States Should Avoid Sales Taxes on Nonprofit Hospital Purchases, Tax Foundation, April 2008. ↑
Id. ↑
David Gau, partial SUT exemption report, Board of Equalization. March 1, 2017. ↑
Id. ↑
Although almost all revenues collected by the imposition of tax on fuels are generally used for transportation funding, a tax on a good has the effect of reducing its consumption. ↑
Discussed in Hearing
1H
Assembly Standing Committee on Appropriations
7MIN
Assembly Standing Committee on Revenue and Taxation
Bill Author
Bill Co-Author(s):
