BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1338 (Lara) - Sales and use taxes:  exemption:  zero-emission  
          and near-zero-emission equipment
          
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          |Version: May 4, 2016            |Policy Vote: GOV. & F. 7 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: May 16, 2016      |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.


          


          Bill  
          Summary: SB 1338 would provide a partial sales and use tax (SUT)  
          exemption for zero and near zero-emission port equipment.


          Fiscal  
          Impact: The Board of Equalization (BOE) indicates that this bill  
          would result in an annual General Fund revenue loss of $4.6  
          million. BOE's implementation costs have yet to be determined,  
          but would minimally reach the hundreds of thousands of dollars  
          annually (General Fund).


          Background: Except where a specific exemption or exclusion is provided,  
          current law imposes the SUT on all retailers for the privilege  
          of selling tangible personal property (TPP) at retail in  
          California, or on the storage, use, or other consumption in this  







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          state of TPP purchased from a retailer. 
          After the state collects SUT revenue ($48 billion in 2013-14),  
          it allocates the money to various state and local funds. Roughly  
          half-collected from an approximately 3.9 percent rate-goes to  
          the General Fund and can be spent on any state program, such as  
          education, health care, and criminal justice. Another 1.25  
          percent, known as the Bradley-Burns rate, goes to cities and  
          counties for general purposes. Three sales tax funds have  
          uniform state rates and support specified programs-an  
          approximately 1.1 percent rate for 2011 realignment  
          (county-administered criminal justice, mental health, and social  
          service programs); a 0.5 percent rate for 1991 realignment  
          (county-administered health and social services programs); and a  
          0.5 percent rate for city and county public safety programs  
          pursuant to Proposition 172 (1993). Additionally, some local  
          governments levy optional local rates-known as Transactions and  
          Use Taxes (TUTs)-and a small portion of these funds are used for  
          general purposes. As of January 1, 2017, the average statewide  
          SUT rate will be 8.21 percent.


          State law fully exempts many items from SUT (such as  
          prescription drugs, food, poultry litter), while other items are  
          exempted from the state sales tax, but not the local share, such  
          as farm equipment and machinery, diesel fuel used for farming  
          and food processing, teleproduction and postproduction  
          equipment, timber harvesting equipment and machinery, and  
          racehorse breeding stock. Partial SUT exemptions are difficult  
          for both retailers and the BOE, and complicate return  
          preparation and processing. Moreover, errors attributable to  
          these partial exemptions occur frequently, resulting in  
          additional return processing workload for BOE.







          Proposed Law:  
          This bill would, for taxable years 2017 through 2029, provide a  
          partial SUT exemption for zero and near zero-emission port  
          equipment.  Specifically this bill would do the following:
                 Provide a General Fund (3.9375 percent) SUT tax  








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               exemption for "qualified TPP" purchased by a "qualified  
               person" to be used "primarily" in, at, or on a marine  
               terminal of a California public port for carriage,  
               handling, or movement of freight, cargo, and goods.


                 Define "qualified tangible personal property" as any of  
               the following:


                  o         Zero-emission or near-zero-emission equipment  
                    used in conjunction with the movement of goods or  
                    freight, including computers, data-processing  
                    equipment, and computer software required to operate,  
                    control, regulate, or maintain the qualified  
                    equipment. 


                  o         Parts used for the repair and replacement of  
                    qualified equipment with a useful life of one or more  
                    years.


                  o         Special purpose buildings and foundations used  
                    as an integral part of the utilization process of  
                    zero-emission or near-zero-emission equipment.


                  o         Leases of qualified tangible personal  
                    property.


                 Define "primarily" as 50 percent or more of the time.


                 Define "qualified person" as a stevedore, marine  
               terminal operator, operator of a port, rail ramp, rail  
               yard, imtermodal facility, or freight yard, or any other  
               person that is engaged in cargo and freight loading,  
               delivery, movement, storage, and conveyance at or within a  
               California public seaport.


                 Define "Zero-emission or near-zero-emission equipment"  








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               means equipment, off-road vehicles, and related  
               technologies used within the boundaries of a California  
               public seaport that reduces or eliminates greenhouse gas  
               emissions and improves air quality as identified by the  
               State Air Resources Board in consultation with the State  
               Energy Resources Conservation and Development Commission.   
               Additionally, "zero-emission and near-zero-emission  
               equipment" may include advanced or alternative fuel engines  
               and hybrid or alternative fuel technologies for seaport  
               equipment.





          The exemption would not apply if, within one year from the date  
          of purchase, the qualified person (1) uses the qualified  
          property in a manner not qualifying for the exemption, (2)  
          converts the qualified property from an exempt use to a  
          non-qualifying use, or (3) removes the qualified property from  
          California. Finally, the bill contains reporting requirements,  
          as specified.




          Staff  
          Comments: As noted above, the bill defines "zero-emission and  
          near-zero-emission equipment" as equipment and off-road vehicles  
          used at California public seaports that reduce or eliminate  
          greenhouse gas emissions, as identified by the California Air  
          Resources Board (CARB) in consultation with the State Energy  
          Resources Conservation and Development Commission. Without such  
          identification, BOE staff would not know the type of equipment  
          and vehicles that should qualify for the SUT exemption.  
          According to CARB, zero-emission and near-zero-emission  
          equipment and off-road vehicles include battery electric, fuel  
          cell electric, plug-in diesel hybrid, and equipment and off-road  
          vehicles powered by compressed natural gas. Eligible equipment  
          and off-road vehicles include zero-emission and  
          near-zero-emission cranes, yard trucks, top handlers, hostlers,  
          side handlers, forklifts, loaders, aerial lifts, excavators, and  
          bulldozers.
          BOE's revenue estimate is based on a December 2015 report  








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          prepared by a port-planning firm that represents West Coast  
          terminal operators and shipping lines. The report estimates that  
          replacing current equipment with zero-emission or  
          near-zero-emission equipment and vehicles (including supporting  
          infrastructure) at the ports of Los Angeles, Long Beach and  
          Oakland, would cost $23 billion over the next 30 years. Using  
          information in the report, BOE's revenue estimate assumes that  
          annual zero-emission equipment purchases by these three ports  
          for the period 2017 to 2029 will be $118 million; the  
          corresponding annual General Fund revenue loss would be $4.6  
          million.


          Staff notes that the BOE revenue estimate understates the  
          magnitude of the bill's revenue loss for two reasons. First, the  
          estimate only considers three of California's seaports. Second,  
          it doesn't reflect purchases of "near-zero emissions equipment.  
          While the three ports incorporate the majority of port activity.  
          The ports of Long Angeles, Long Beach and Oakland account for  
          the majority of seaport activity in the State; consequently, the  
          revenue loss from qualifying purchases of zero-emission  
          equipment by other ports in the State would likely be minor in  
          comparison. The additional revenue loss associated with  
          purchases of near-zero emissions equipment by all the State's  
          ports is unknown.


          BOE would incur administrative costs to notify affected  
          retailers, modify tax returns, program for the exemption's  
          partial rate, prepare a special publication, audit claimed  
          exemptions, and answer inquiries from taxpayers and the general  
          public. A fulling costing has yet to be performed, but would at  
          a minimum reach the hundreds of thousands of dollars annually.




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