AB 199
Page 1
(Without Reference to File)
CONCURRENCE IN SENATE AMENDMENTS
CSA1 Bill Id:AB 199
Author:(Eggman)
As Amended Ver:September 10, 2015
2/3 vote. Urgency
ASSEMBLY: / 77-0 / (August 27, 2015) / SENATE: / (September 11, 2015)(vote not available)
Original Committee Reference: NAT. RES.
SUMMARY: Expands the sales and use tax (SUT) exclusion under the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) by revising the definition of a "project" to include tangible personal property (TPP) that primarily processes or uses "recycled feedstock."
The Senate amendments add double jointing language to address possible chaptering out issues with Assembly Bill 1269 (Dababneh) of the current legislative session.
FISCAL EFFECT: According to BOE, "Existing law limits the allowable sales and use tax exclusion for all projects approved by CAEAFTA, including this bill's described projects, to $100 million each calendar year. Between November 2010 and July 2015, CAEATFA has approved tax exclusions of about $318 million, but only $81.8 million in tax has actually been claimed."
AS PASSED BY THE ASSEMBLY, this bill expanded the SUT exclusion under CAEATFA by revising the definition of a "project" to include TPP that primarily processes or uses "recycled feedstock."
COMMENTS:
Author’s Statement: The author states that "California exports 20 million tons of recyclables annually, worth nearly $8 billion. With AB 199, the state would help incentivize the recycling sector to invest more in manufacturing. Keeping more of these valuable materials in-state would allow Californians to share in both the environmental and economic benefits of their recycling."
CAEATFA Background: The California Alternative Energy Source Financing Authority was established in 1980 with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, cogeneration and geothermal. In 1994, the authority was renamed "CAEATFA" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources, and to develop clean distributed generation. The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission.
CAEATFA may provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects. In addition, with the passage of SB 71 (Padilla), Chapter 10, Statutes of 2010, CAEATFA is allowed to grant a SUT exemption to provide financial assistance for the purchase of equipment that is used for the design, manufacture, production, or assembly of "advanced transportation technologies" or "alternative source" products, components, or systems (SB 71 Program). Alternative source products include cogeneration technology, energy conservation, solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. Alternative sources also include advanced electric distributive generation technology and energy storage technology. The SB 71 Program will sunset on January 1, 2021. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012, again expanded the SUT exclusion program to include advanced manufacturing projects.
Benefits Analysis: As noted above, CAEATFA may provide a SUT exclusion for the purpose of promoting the creation of California-based manufacturing, California-based jobs, advanced manufacturing, the reduction of greenhouse gases, or the reduction in air and water pollution or energy consumption. Before a SUT exclusion can be awarded, CAEATFA is required to determine the eligibility of individual projects based on a number of factors relating to a reduction in greenhouse gases and the creation of manufacturing jobs. An important factor that CAEATFA is required to consider is the extent to which the anticipated benefit to the state from the project equals or exceeds the loss of sales and use tax.
What Does this Bill Do? This bill expands the types of projects that may qualify for the SUT exclusion to include TPP that is either: 1) primarily used to process recycled feedstock intended to be reused in the production of another product, or 2) primarily utilizes recycled feedstock in the production of another product or soil amendment. "Recycled feedstock" is defined as materials that would otherwise be destined for disposal, having completed its intended end use and product lifecycle.
According to CalRecycle, between 6% (for multi-stream) and 81% (for mixed waste) of the incoming material at a Materials Recovery Facility (MRF) is usually sent to landfills for final disposal.[1] MRFs receive recyclables and sorts the materials by type or grade to meet the commodity specifications. The inability of the MRF to recycle a larger portion of the materials is due, in part, to a lack of equipment capable of sorting the various plastics, paper, metals, and glass. The expansion of qualifying projects is meant to incentives the purchase of machinery that is better able to sort recyclable material, thereby reducing the amount of recyclable material that ends up in landfills.
The second provision of this bill provides a SUT exclusion for TPP that primarily utilizes recycled feedstock in the production of another product or soil amendment. According to CalRecycle, there are approximately 160 MRFs throughout the state, which sort recyclable material. Once recoverable materials are collected and sorted or processed, they are delivered to recycling or manufacturing markets in California, domestically and internationally. However, according to CalRecycle, there is a minimal manufacturing infrastructure in California for recycled glass, paper, plastic, and tires. If all of the reported material from processing facilities for glass, paper, and plastics went to manufacturing facilities in California, the supply would exceed the manufacturing capacity by more than 300%. Therefore, the inclusion of TPP that primarily utilizes recycled feedstock is meant to increase the manufacturing capacity of recycled material. Finally, within the second provision, this bill also provides a SUT exclusion for TPP that primarily uses recycled feedstock to create soil amendment.
Partial Sales and Use Tax Exemption: The rationale for providing a SUT exemption on business inputs 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 tangible item. The tax paid on TPP 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." (Joseph Henchman, States Should Avoid Sales Taxes on Nonprofit Hospital Purchases, Tax Foundation, April 2008.) 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. (Id.)
The passage of AB 93 (Budget Committee), Chapter 69, Statutes of 2013, and SB 90 (Galgiani), Chapter 70, Statutes of 2013, created California's first effort to grant a partial SUT exemption for taxpayers performing manufacturing or research and development in the state. There are a few differences between CAEATFA's SUT exclusion and the state's partial SUT exemption. The partial exemption rate is currently 4.1875%. The partial exemption provides that sales of the qualifying property sold to a qualified person be taxed at a rate of 3.3125% (7.50% current statewide tax rate – 4.1875% partial exemption) plus any applicable district taxes. Under CAEATFA, an approved project does not pay any SUT tax, including local and district taxes. Additionally, the state's SUT exemption is much broader and more readily available. So long as a business meets all requirements, a qualifying manufacturer can receive a partial SUT exemption. CAEATFA, however, is a more robust process, requiring the applicant to meet a set of criteria before the exclusion can apply. Furthermore, the programs appear to accomplish different goals. Both programs reduce the economic distortions related to taxing business inputs, but CAEATFA appears to also be concerned with encouraging projects that provide a greater return on investment for the state. As noted above, the anticipated project benefits, measured by the fiscal and environmental benefit to the state, must exceed the cost of forgone SUT. No such analysis is needed for the partial SUT exemption.
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0002392
[1] "Multi-stream" refers to incoming recyclables that have usually been collected separately from each other; for example, a curbside program that separates paper from glass or plastic prior to pick-up is considered "multi-stream". "Single-stream" refers to all incoming recyclables that have been collected in one stream, such as in a residential blue bin program. Recyclables collected in a single-stream manner often have a higher level of contamination than materials received through a multi-stream process. (State of Recycling in California, CalRecycle, March 2015.)