SB 71 - Sales Tax Exemption for Clean Manufacturing Equipment

Today (3/24/10), Governor Schwarzenegger signed SB 71 to enable a mechanism for manufacturers to obtain a sales tax exemption for the purchase of green manufacturing equipment.

The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) was created in 1980 (California Chapter 908 (1980), Public Resources Code §§26000-26037.). The CAEATFA was designed to provide methods for financing technologies that promote development of renewable energy sources or that conserve scarce energy resources. In 1994, “advanced transportation” was added to the title to promote development and commercialization of new transportation technologies. SB 71 further expands this funding source to include clean-tech manufacturers. Such funding expires after 12/31/20. The Legislative Analyst's Office is to issue a report on the "effectiveness of the program on or before January 1, 2019, evaluating factors including but not limited to: the number of jobs created in
California; the number of businesses retained in or relocated to California; the amount of state and local revenue and economic activity generated" (Assembly Analysis 3/22/10).

In 2008, CAEATFA was in the news because it was used to enable a sales tax exemption for manufacturing equipment purchased by Tesla Motors (see Nellen, "Incentives Spur ZEV Manufacturing," Journal of Multistate Taxation and Incentives, Nov/Dec 2008).

The process to get the exemption is more complicated than just telling the equipment vendor that you are eligible for an exemption. The purchaser must apply for the exemption with the CAEATFA and additional paperwork is also required (see CAEATFA website for details).

Is SB 71 good tax policy? Mostly.

• Equity: Why is the exemption only available to certain manufacturers rather than to all manufacturers? The reason is that the state is trying to build a clean-tech industry which it hopes will create jobs and improve the economy.
• Simplicity and Economy in Collection: The CAEATFA exemption approach is more complicated than just asking a seller for the exemption. Much more paperwork and time is required.
• Economic Growth & Efficiency: Given the emphasis on reducing greenhouse gas emissions and improving the environment, by both businesses and households, it seems wise for California to do whatever it can to ensure that this industry takes a strong hold in California. Otherwise, the California economy will continue to suffer and have difficulty rebuilding. To avoid pyramiding of the sales tax, all businesses should have a sales tax exemption on their purchases. SB 71 does not go far enough (but that is because SB 71 is focused more on clean tech than improving the tax law).
• Minimum tax gap: Given the CAEATFA approval process, it is extremely unlikely that the exemption will go to an unqualified taxpayer.
• Transparency and accountability: The application process results in the state knowing up front (before any exemption is approved), what the cost will be. That is a more accountable approach than just giving an exemption to be given by sellers. It also allows the state to control the "cost" of the exemption. The legislation also calls for a report by the LAO and the provision sunsets in ten years to allow an opportunity to be sure it is meeting its goals without becoming a permanent provision in the law.