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AB-600 Sales and use taxes: exemption: manufacturing and research: useful life: electric power generation.(2017-2018)

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Date Published: 05/02/2017 09:00 PM
AB600:v97#DOCUMENT

Amended  IN  Assembly  May 02, 2017
Amended  IN  Assembly  April 03, 2017

CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Assembly Bill No. 600


Introduced by Assembly Member Cooper
(Principal coauthor: Assembly Member Quirk-Silva)
(Principal coauthor: Senator Galgiani)
(Coauthors: Assembly Members Aguiar-Curry, Travis Allen, Bocanegra, Brough, Burke, Caballero, Calderon, Choi, Cunningham, Fong, Gipson, Gray, and Obernolte)
(Coauthors: Senators Cannella, Gaines, Glazer, Nielsen, Nguyen, Roth, Vidak, and Wilk)

February 14, 2017


An act to amend, add, and repeal Section 6377.1 of the Revenue and Taxation Code, relating to taxation. taxation, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


AB 600, as amended, Cooper. Sales and use taxes: exemption: manufacturing and research: useful life: electric power generation.
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 state’s 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.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 (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 California’s 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 state’s 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 person’s manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified person’s 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 department’s 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 person’s manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified person’s 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 department’s 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.