California’s Cap-and-Trade Bill Enhances Existing Tax Incentive

Chris Micheli
Attorney and Lobbyist at the Sacramento government relations firm of Aprea & Micheli, Inc.

As part of the cap-and-trade deal that was ironed out shortly before the Legislature went on its summer recess, two bills were enacted. AB 617 (Cristina Garcia) dealt with air emissions, while AB 398 (Eduardo Garcia) dealt with the program itself. Contained in AB 398 was an elimination of an existing fee, as well as enhancements to an existing tax incentive for businesses. AB 398 was signed on July 25 and became Chapter 135. As an urgency clause statute, the bill took effect immediately on that same date.

Among other provisions, AB 398, until January 1, 2031, extends the applicability of a regulation that establishes a system of market-based declining annual aggregate emissions limits for sources or categories of sources that emit greenhouse gases to December 31, 2030. In addition, AB 398 eliminated the fire prevention fee and extended and expanded the partial sales tax exemption for the purchase of specified manufacturing equipment.

Under current state law (Revenue & Taxation Code Section 6377.1), commencing July 1, 2017, the California Department of Tax and Fee Administration (formerly the State Board of Equalization) is responsible for the administration of the Sales and Use Tax Law and existing sales and use tax laws impose taxes on retailers measured by the 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. It also provides various exemptions from those taxes.

Among those exemptions is the partial exemption for manufacturing and research and development equipment. Pursuant to this partial exemption, existing state law exempts from those taxes, on and after July 1, 2014, and before July 1, 2022, the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person for use primarily in manufacturing, processing, refining, fabricating, or recycling of tangible personal property; qualified tangible personal property purchased for use by a qualified person to be used primarily in research and development; 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; and, qualified tangible personal property purchased 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 specified processes.

Pursuant to AB 398, on and after July 1, 2014, and before July 1, 2030, the partial exemption is expanded to exempt from those taxes qualified tangible personal property purchased for use by a qualified person to be used primarily in the generation or production, or storage and distribution, of electric power or purchased for use by a contractor for the qualified person.

As such subdivision (a)(5) was added to Section 6377.1 to provide: “(5) Qualified tangible personal property purchased for use by a qualified person to be used primarily in the generation or production, or storage and distribution, of electric power.” In addition, subdivision (b)(3) added the following definition: “(3) “Generation or production” means the activity of making, producing, creating, or converting electric power from sources other than a conventional power source, as defined in Section 2805 of the Public Utilities Code.” And, subdivision (b)(12) added the following definition: “(12) “Storage and distribution” means storing or distributing through the electric grid, but not transmission of, electric power to consumers regardless of source.”

Moreover, AB 398, on and after January 1, 2018, and until July 1, 2030, exempts from those taxes special purpose buildings and foundations used for the generation or production or storage and distribution of electric power. And, on and after January 1, 2018, and until July 1, 2030, the bill expands the definition of qualified person to include a person primarily engaged in the business of electric power generation.

AB 398 also added subdivision (b)(8)(a)(ii) to Section 6377.1 to provide that a “qualified person” means: “(ii) On and after January 1, 2018, and before July 1, 2030, a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 22111 to 221118, inclusive, 221122, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.”

Additionally, AB 398 added (b)(9)(A)(II) to Section 6377.1 to provide that “qualified tangible personal property” includes: “(II) On and after January 1, 2018, and before July 1, 2030, 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 or production or storage and distribution of electric power. Buildings used solely for warehousing purposes after completion of those processes are not included.”

AB 398 also modified the definition of “useful life” so that there would not be a different impact between those who capitalize or expense their tangible personal property. Section 6377.1(b)(13)(A) was amended to read: (13) (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 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 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. For the purposes of this paragraph, tangible personal property that is deducted under Sections 17201 and 17255 or Section 24356 shall be deemed to have a useful life of one or more years.

In addition, AB 398 requires the CDTFA to provide an exemption report to the Department of Finance and requires the total dollar amount, as reported by the department, with the concurrence of the Department of Finance, to be transferred from the Greenhouse Gas Reduction Fund to the General Fund.

Finally, existing law provides that the State of California has the primary financial responsibility for preventing and suppressing fires in areas that the State Board of Forestry and Fire Protection has determined are state responsibility areas. Current state law requires that a fire prevention fee be charged on each habitable structure on a parcel that is within a state responsibility area, to be used for specified fire prevention activities.

AB 398, until January 1, 2031, suspends the fire prevention fee. The bill declares that it is the intent of the Legislature that moneys derived from the auction or sale of allowances pursuant to the market-based compliance mechanism replace the fire prevention fee to continue the funding of the fire prevention activities. AB 398 repeals the fire prevention fee on January 1, 2031.

Chris Micheli is an attorney and legislative advocate at the Sacramento governmental relations firm of Aprea & Micheli, Inc. He can be reached at (916) 448-3075.

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