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 ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 4, 2016 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 16, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 SB 1338 (Lara) Page 1 of ? 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 SB 1338 (Lara) Page 2 of ? 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" SB 1338 (Lara) Page 3 of ? 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 SB 1338 (Lara) Page 4 of ? 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. -- END --