HomeMy WebLinkAboutMINUTES - 05111993 - 2.3 TO BOARD OF SUPERVISORS
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DATE: May 6, 1993
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SUBJECT: LEGISLATION - AB 1313 (W. Brown)
SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION
RECOMMENDATION:
DETERMINE what position the Board wishes to take on AB 1313 by
Assembly Speaker Willie Brown which would exempt the sale of
manufacturing equipment from the sales tax.
BACKGROUND:
On May 4, 1993, the Board of Supervisors was asked by Henry Clarke,
General Manager of Public Employees Union, Local 1, to oppose AB
1313 . The Board asked that the item be listed on the Board' s
agenda May 11, 1993 for discussion.
AB 1313 would exempt from the sales 'tax tangible personal property
used primarily in any stage of manufacturing, processing, refining,
extracting, or fabricating of property or producing electricity,
steam, or fuel, beginning at the point any raw materials are
received and ending at the point at which the manufacturing process
has altered property to its completed form, including packaging, if
necessary.
In addition, AB 1313 exempts from the sales tax tangible personal
property used or consumed in research and development and tangible
personal property used to maintain or repair any equipment which is
otherwise exempted under the provisions of this bill .
There have been newspaper stories recently to the affect that one
or more manufacturing firms has decided not to expand their
operations in California or to remove their existing plant to other
states, in part because of the cost of the sales tax on the
machinery which would be required in the plant.
CONTINUED ON ATTACHMENT: YES SIGNATURE:
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RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
APPROVE OTHER
SIGNATURE(S):
ACTION OF BOARD ON May 111993 APPROVED AS RECOMMENDED OTHER
i
The Board ADOPTED a position in opposition to AB 1313 in its present form
unless amended to include protections to the cities and counties against
sales tax revenue losses .
VOTE OF SUPERVISORS
X _ _ _ I HEREBY CERTIFY THAT THIS IS A TRUE
UNANIMOUS(ABSENT ) AND CORRECT COPY OF AN ACTION TAKEN
AYES: NOES: AND ENTERED ON THE MINUTES OF THE BOARD
ABSENT: ABSTAIN: OF SUPERVISORS ON THE DATE SHOWN.
ATTESTED May 11, 1993
Contact: PHIL BATCHELOR,CLERK OF THE BOARD OF
CC: County Administrator SUPERVISORS AND COUNTY ADMINISTRATOR
Local 1 (via C/A)
Les Spahnn, Heim, Noack & Spahnn ,
(via C/A) BY / DEPUTY
-2-
At the same time, it is obvious that at least in the short-term,
the bill will reduce the State' s revenue. Whether this reduced
revenue is more than offset by a verifiable loss of jobs and.income
tax revenue is not something easily quantified.
It is, therefore, up to the Board to determine whether to take a
position on AB 1313 and if so what position to take.
CALIFORNIA LEGISLATURE-1993-94 REGULAR SESSION
ASSEMBLY BILL No. 1313
Introduced by Assembly Member Willie Brown
March 3, 1993
An act to add Section 6377 to the Revenue and Taxation
Code, relating to taxation, to take effect immediately, tax
levy.
LEGISLATIVE COUNSEL'S DIGEST
AB 1313, as introduced, W. Brown. Sales and use taxes:
exemptions: manufacturers.
The existing Sales and Use Tax Law imposes a tax on the
gross receipts from the sale of, or the storage, use, or other
consumption in this state of; tangible personal property and ,
provides various exemptions from the taxes imposed by that
law.
This bill would provide an exemption from those taxes for
the gross receipts from the sale of, and the storage, use, or
other consumption of, tangible personal property primarily
used in any stage of manufacturing, processing, refining,
extracting, or fabricating of property, or producing
electricity, steam, or fuel, as specified. The bill would also
exempt the gross receipts from the sale of, and the storage,
use, or other consumption of, tangible personal. property
primarily used or consumed in research and development or
used to maintain or repair any property exempted by this bill.
The exemption would not apply 'to any tangible personal
property that is used primarily in administration, general
management, or marketing. The bill would require that the
purchaser furnish the retailer with an exemption certificate,
as specified.
Counties and cities are authorized to impose local sales and
use taxes in conformity with state sales and use taxes.
99 90
AB 1313 — 2 —
Exemptions
2 —Exemptions from state sales and use taxes enacted by the.
Legislature are incorporated into the local taxes.
Section 2230 of the Revenue and Taxation Code provides
that the state will reimburse counties and cities for revenue
losses caused by the enactment of sales and use, tax
exemptions.
This bill would provide that no appropriation is made and
the state shall not reimburse local agencies for sales and use
tax revenues lost by,them pursuant to this bill.
This bill would take effect immediately as a tax levy, but its
operative date. would depend on its effective date.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes..
The people of the State of California do enact as follows.
1 SECTION 1. Section 6377.is added to the Revenue
2 and Taxation Code, to read: .
3 6377. (a) There are . exempted from the taxes
4 imposed by this part the gross receipts from the sale of,
5 or the storage, use, or other consumption in this state of,
6 all of the following:
. 7 (1) Tangible personal property primarily used in any
8 stage of the manufacturing, processing, refining,
9 extracting, or fabricating of property, or producing .
10 electricity, steam, or fuel, beginning at the point-any raw
11 materials are received and ending at the point at which
12 the manufacturing, processing, .refining, - extracting,
13 fabricating, or producing has altered property to its
. 14 completed form, including packaging, if required. Any
15 sales made to a contractor or subcontractor for use in the
16 performance of a construction contract for a
17 manufacturer shall be deemed to be made to the
18 manufacturer for purposes of this exemption.
19 (2) Tangible personal property primarily. used or
20 consumed in research and development.
21 (3) Tangible personal property primarily used to
22 maintain or repair any property described in paragraph
23 (1) or (2).
24 This exemption shall not apply to any tangible personal
99 120
-3 — AB 1313
,e . 1 property that is used primarily in administration, general
2 management, or marketing.
,s 3 (b) For purposes of this section:
e 4 (1) "Extracting" means exploration for, or removal of,
X 5 a natural resource from its native environment.
6 (2) "Fabricating" means to make, build, create,
d 7 produce, or assemble components or property to work in
e 8 a new or different manner.
9 . (3) "Manufacturing" means the activity of converting
:s 10 or conditioning . property by changing. the form,
11 composition, quality, .or character of the property for
s. 12 ultimate sale at retail or use in the'manufacturing of a
13 product to be ultimately sold at retail. Manufacturing
14 includes any improvements to tangible personal property
15 that result in a greater service life or greater functionality
16 than that of the original property.
e 17 (4) "Measuring or testing" includes both
18 nondestructive and destructive measuring or testing, and
,s 19 the alignment and calibration of machinery, equipment,
F, 20 and tools, in the . furtherance of manufacturing,
F, 21 processing, refining, extracting, or fabricating of
22 property or producing electricity, steam, or fuel.
y 23 (5) "Processing" means the physical application of the
r 24 materials and labor necessary to modify or change the
" 25 characteristics of property.
26 (6) "Refining" means the process of converting a
h 27 natural resource to anintermediate or finished product.
28 (7) "Research and development" means . basic and
" 29 applied research and experimental activities in the
30 sciences and engineering, and designing, developing, or
e
31 testing prototypes, processes, or new products, including
a 32 research and development of computer software that is
e 33 embedded in, or an integral part of, the prototype or new
34 product or that is required for property otherwise
r 35 exempt under this section to function effectively.
36 (8) "Tangible personal property" includes; but is not
0 37 limited to, all of the following:
h 38 (A) Machinery and equipment, including component
39 parts and contrivances such as.belts, shafts, moving parts,
d 40 and operating structures.
,A 99 130
AB 1313 —4 -
1
4 -1 (B) All equipment or devices used or required to
2 - operate, control, regulate, or maintain the machinery,
3 including, without limitation, computers, data processing
4 equipment, and computer software, together with all
5 repair and replacement parts therefor, whether
6 purchased separately or in conjunction with a complete
7 machine and regardless ,of whether the machine or
8 component parts . are assembled by the .taxpayer or
9 another party.
10 (C) Property used in pollution control.
11 (D) Other safety equipment related to any activity
12 exempt under this section.
13 (E). Special purpose buildings and foundations used to
14 . 'house or support the exempt equipment
15 (F) Lubricants, hydraulic oil, coolants, chemicals,
16 catalysts, fuels, and other property used or consumed in
17 the manufacturing process.
18 (c)..�No exemption shall be allowed under this section
19 unless the purchaser furnishes the retailer with an
20 exemption certificate,completed in accordance with any
21 instructions or regulations as the.board may. prescribe.
22 SEC..2. Notwithstanding Section 2230 of the Revenue
23 and Taxation Code, no appropriation is made by this act
24 and.the state shall not reimburse any local agency for any
25 sales and use tax revenues lost by it under this act.
26 SEC. 3. This act provides for a tax levy .within the
27 meaning of Article IV of the Constitution and shall go into
28 immediate effect. However, the provisions of this act
29 shall become operative on the first day of the first
30 calendar quarter commencing more than90 days after
31 the effective date of this act.
O
99 150
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AB 1313
Date of Hearing: May 10, 1993
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Johan Klehs, Chair
AB 1313 (W. Brown) - As Introduced: March 3, 1993
SUBJECT Exempts from the sales tax the purchase of specified manufacturing
equipment
DIGEST
Majority Vote. Tax Levy. Fiscal Committee.
Existing law imposes a sales tax on retailers for the privilege of selling
tangible personal property in this state. The sales tax applies with respect
to all sales or purchases of tangible personal property, unless that property
is specifically exempted.
However, since the sales tax is imposed on retail sales, sales for resale and
wholesale are excluded from tax. In other words, if a business purchases
"parts" A and B. in order to directly make "finished product" C, only the
sale of C at retail is taxable, wholesale purchase of component parts A and B
are generally exempt.
Current law does not contain an exemption for manufacturing-related
equipment.
Therefore, when a business purchases equipment for use in its business, tax
applies to the purchase price of that equipment.
Existing law also requires the state to reimburse counties and cities for
revenue losses caused by the enactment of sales and use tax exemptions .
This bill creates a new exemption under the sales and use tax for any
tangible personal property primarily used in: (i) any stage of manufacturing,
as defined; (ii) research and development activities; or (iii) the repair or
maintenance of qualified manufacturing or research and development equipment.
Specifically, this bill:
1) Exempts from the sales and use tax tangible personal property used
primarily in:
a) Any stage of "manufacturing, processing, refining,
extracting, or fabricating of property, or producing electricity,
steam, or fuel" . Sales made to a contractor in performance of
contracts are deemed to be made to the manufacturer for purposes
of this provision.
b) Research and development.
c) Repair or maintenance of manufacturing or research and
development property described in (a) and (b) ..
2) Specifies that the newly created exemption shall not apply to
property used primarily in administration, general management, or
marketing.
3) Defines "manufacturing" as the activity of "converting or
conditioning property by changing the form, composition, quality, or
character of the property" for ultimate sale at retail.
4 ) Defines research and development as "basic and applied research and
experimental activities in the sciences and engineering" , and includes
the design of prototypes and specified computer software.
5) Included in the definition of tangible personal property is:
a) Equipment used to operate or control machinery including,
without limitation, computers . data processing equipment, and
computer software. "
b) Property used in pollution control, safety equipment, and
"special purpose buildings and foundations" .
c) Lubricants, coolants, fuels and other property used in the
manufacturing process .
6 ) Specifies that no exemption will be allowed unless a qualifying
purchaser provides the retailer with an exemption certificate.
7) Provides that no reimbursement to local agencies for sales tax
revenues lost as a result of this measure shall take place.
8) Takes effect immediately as a tax levy, but specifies an operative
date of the first calendar quarter beginning more than 90 days after
the bill is chaptered.
FISCAL EFFECT
State: The Board of Equalization estimates that this measure would result in
reduced sales tax revenues (state and local) "of at least $2. 2 billion. "
Approximately 10% of this revenue loss would be offset by additional income
taxes paid by businesses, because sales taxes paid are a deductible business
expense for income tax purposes (see comments 5 and 6 for a further
discussion of this bill's revenue effect) .
Local: Local government's share of the $2 . 2 billion sales tax loss would be
in excess of $500 million dollars .
COMMENTS
1) Purpose Of The Bill
According to the author's office, the purpose of this measure is to
enhance California's competitive environment for manufacturers .
California is one of a very few states (see comment 3 ) which currently
imposes a sales tax on the purchase of manufacturing equipment. The
author and sponsor (California Manufacturers Association) believe
creation of this exemption under California law will allow the state to
more effectively compete with other states for new and expanding
manufacturing facilities .
2) Should Manufacturing Equipment Be Exempt?
i
Under existing California law, manufacturers generally do not pay sales
tax on the purchase of parts or components which are used to produce a
final product for resale. This exemption is provided to avoid the
"double" taxation of these component parts, once on the purchase by the
manufacturer and then again on the purchase by the final consumer.
However, existing law does not provide an exemption for equipment that a
manufacturer uses to assemble component parts into a final product. It
can be argued that this differential treatment for component parts versus
the equipment which puts the parts together has little tax policy
justification.
The cost of equipment used to assemble parts clearly becomes a portion of
a final product's sale price. Thus, the value of this equipment is
essentially being taxed twice, once on purchase by the manufacturer, and
then again as a portion of a final product's sale price.
3) The Manufacturing Equipment Exemption In Other States
Forty five other states impose a sales tax. Of these 45 states,
approximately 36, or 80%, grant at least a partial exemption from the
sales tax for purchases of manufacturing equipment. Attachment I
displays a map shoving those states which provide a full exemption, a
partial exemption, no exemption, or have no sales tax. (Not shown on the
map are Alaska and Hawaii, Alaska does not impose a sales tax, while
Hawaii has a sales tax and provides no exemption for manufacturing
equipment. )
While most other states which impose a sales tax provide an exemption for
manufacturing equipment, the nature of this exemption varies widely
across states . The provisions of this measure are broader than that
provided by many states . For example, both Minnesota and Utah confine
their exemptions to new or expansion equipment, several other states do
not include maintenance and repair equipment or parts, and other states
provide only a reduced sales tax rate on manufacturing equipment.
4) California's Relative Tax Burden
Comparing only whether or not a state grants a particular sales tax
exemption can be deceptive regarding a state's overall relative tax
burden. For example, while California does impose a tax on manufacturing
equipment which tends to be a competitive disadvantage, California, as a
result of Proposition 13, imposes one of the lowest property tax burdens
on business property in the country.
In a recent paper discussing California's relative tax burden, Steve
Gold, Director of the Center for the Study of the States, at the
University of New York at Albany, cited three different sources which
evaluated Californials relative tax burden.
A study by the Utah State Tax Commission ranked California's tax burden
on business as a percentage of gross state product lowest among 7 western
states . Another study by the Wisconsin Revenue Department shoved
California as having the 6th highest tax burden out of 19 selected
states . Finally, as measured by tax revenue per $100 of personal income,
California's total state and local tax burden ranked 22nd at $11 . 24 per
$100, slightly below the national average $11 . 33, and lower than the
states of New Mexico ( $12 . 48) , Arizona ($12 . 64 ) , Oregon ( $12 . 05) , and
Utah ($11 . 67 ) ; states which are frequently cited as competitors with
California .
Gold' s overall conclusion regarding California taxation stated "it does
not appear that the level of taxation is a primary cause of Californials
economic travails . Problems with workers compensation, severe
regulations, and congestion are more important in harming business
climate than taxes . "
5) The Direct Revenue Effect Of This Measure
The Board of Equalization estimates that this measure will result in
total state and local revenue losses of at least $2 . 2 billion. A summary
of the components of this total revenue loss estimate are shown in
Attachment II .
This revenue loss figure does not include losses associated with
potentially large categories of spending, including restaurants, research
and development in the trade and service sector, or items which may be
exempt in the financial services area. Accordingly, the direct revenue
loss figure could be significantly higher. The estimate involves a great
deal of uncertainty due to the difficulty in obtaining data regarding who
pays the sales tax, and the level of uncertainty which exists regarding
the exact interpretation of the bill's provisions .
Local government' s share of these losses will vary based on how much of a
local agency's sales tax base relates to the equipment, etc. exempted by
this measure. Total local government revenue losses would be
approximately 25% of the state sales tax loss figure, or given the $2 . 2
billion figure, at least $500 million. This revenue loss figure could be
spread very unevenly across jurisdictions, depending on the nature of the
local sales tax base.
A portion of the state revenue loss, probably around 10%, will be offset
by increased business income taxes . Business income taxes increase
because sales taxes paid on manufacturing equipment are deductible
expenses, either immediately or the sales tax is capitalized and
depreciated along with the purchased equipment.
6 ) Will New Investment Pay For The Direct Revenue Loss?
Eliminating the sales tax on manufacturing equipment will "free up"
dollars for firms doing business in California, which should, all other
things being constant, result in a marginal increase in investment or
expenditures in California. This additional spending will likely produce
additional property, personal income, corporate, and sales tax
collections which would partially offset the $2. 2 billion plus direct
revenue loss discussed above.
However, at the same time, there are several factors which are likely to
at least partially offset, if not eliminate, these indirect revenue
benefits . A first consideration is the effect of "leakages" from the tax
dollar savings that are generated for business through this measure's
exemption. In other words, out of each sales tax dollar saved by a firm,
particularly a large multinational company, a portion of that dollar will
flow outside of California either in the form of investment elsewhere,
compensation to nonresident employees, or dividends to nonresident
shareholders .
After allowing for these leakages, it is assumed that the remaining
portion of the tax dollar saved by a business is invested or spent in
y
California generating other tax dollars . However, the benefit of this
marginal investment and associated tax revenue must be contrasted with
the "opportunity cost" of the dollars lost by government. That is,
granting this sales tax exemption will require reduced governmental
spending, which will in tum reduce the tax dollars generated by public
sector expenditures .
For example, granting this exemption might require reduced spending on
education, which means fever dollars devoted to teacher salaries and
other expenses, which reduces income and other tax collections . At the
same time, this reduced education spending potentially results in a less
educated workforce, which leads to inefficient workers, lower wages, and
lower tax revenues . In other words, there is also a "multiplier" effect
for public sector expenditures which would have to be foregone as a
result of this measure.
Dr. David Vasche, manager of tax policy research for the Franchise Tax
Board, in testimony before a joint Assembly and Senate tax committee
hearing earlier this year concludes that "many economists believe that it
is extremely difficult, if not impossible, to make accurate quantitative
estimates and projections of the secondary and tertiary economic and
fiscal impacts of state tax incentives . "
7 ) Measure Uses A Broad Definition Of Manufacturer
As drafted, this measure uses a relatively broad definition of what
constitutes manufacturing equipment. Accordingly, the bill exempts
certain purchases by businesses which might not normally be considered
manufacturers . Based on discussions with BOE staff, the following
categories, among others, of purchases would be exempt under this bill:
a) Equipment used to prepare food in a restaurant;
b) Farm equipment;
c) Equipment used to extract oil or other natural resources;
d) Equipment used to produce electricity, and fuel consumed in
the production of that electricity;
e) Machinery and equipment used by construction contractors;
f) Equipment purchased by landscapers:
g) Equipment used by photofinishers;
h) Certain equipment and supplies used by advertising
agencies;
i) Auto repair parts provided on certain company owned
vehicles;
j ) Most purchases of computer equipment. As this list
demonstrates, the language of this bill goes substantially beyond
what is often considered manufacturing equipment.
8) Possible Alternative Definition Of Manufacturing Equipment
If the author's intent is to exclude from sales tax only purchases that
look wore like manufacturing, particularly manufacturing activity which
s
is "mobile, " it might be helpful to consider the approach taken by the
state of Utah. Utah statutes provide that only equipment purchased by
businesses which are classified as manufacturers under Standard
Industrial Classification (SIC) codes are eligible for a sales tax
exemption.
SIC codes are a comprehensive listing of industries produced by the
federal Office of Management and Budget, and generally are well defined.
Use of this classification scheme would provide more certainty regarding
which purchases would be exempt.
Limiting the exemption to SIC code manufacturers also would eliminate at
least some of the types of business purchases now covered by the bill
which do not look like mobile industries . For example, the SIC code
definition of manufacturers does not include mining and extraction
industries, restaurants, agriculture, construction, or electricity
production.
Additionally, if the language of the exemption was confined to equipment
which is capitalized and depreciated (versus expensed) , further
enforcement and taxpayer certainty would be provided, and the bill would
look more like an "equipment" exemption.
9) Possible Alternative Definition For Research And Development
The bill creates a new definition of research and development activities .
Interpretation of this definition may be difficult for BOE staff, since
it is not a distinction they are currently required to make.
Alternatively, the bill could be drafted to reference Internal Revenue
Code sections which define research and development activities for
purposes of the research and development income tax credit. Using this
definition might reduce confusion both for board staff and taxpayers .
10) Should The Measure Be Structured As A Rebate Program
The state of Minnesota grants a partial sales tax exemption for the
purchase of manufacturing equipment. However, the program requires that
manufacturers actually pay the sales tax when equipment is purchased, and
then apply for a rebate of the tax paid to the state. Minnesota believes
this approach enhances compliance, and allows the state to track where
the exemption dollars are going.
Should this measure be amended to adopt a rebate approach to the
exemption granted? While a rebate program would be more complex
administratively both for taxpayers and the state, is this additional
complexity justified given the $2 . 2 billion dollars involved?
11) BOE Technical Concern
The BOE questions why a definition for the term "measuring and testing"
is included in the bill, when that .term is not used anywhere else in the
measure. If the definition is not needed, it should be deleted from the
bill.
END OF REPORT
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