HomeMy WebLinkAboutLegislative Review CMTE SB 1643 (Runner)� i
CITY OF PALM DESERT d" ��...
Community Services Division
Staff Report
REQUEST:
SUBMITTED BY:
DATE:
CONTENTS:
CONSIDERATION
ACTION ON SB
APRIL 5, 2006
Patricia Scully, CFEE, Senior Management Analyst
April 27, 2006
SB 1643 Language
OF LEGISLATIVE REVIEW COMMITTEE
1643 (RUNNER) AT ITS MEETING OF
RECOMMENDATION:
By Minute Motion, concur with the action taken by the Legislative Review Committee at its
meeting of April 5, 2006, and direct staff to prepare a letter of opposition for the Mayor's
signature with regard to SB 1643 (Runner) relative to sales and use tax exemptions.
EXECUTIVE SUMMARY:
Passage of SB 1643 would exempt manufacturers from sales and use tax.
BACKGROUND:
The Sales and Use Tax Law imposes a tax on the gross receipts from the sale in this State
of, or the storage, use, or other consumption in this State of, tangible personal property
and provides various exemptions from the taxes imposed by this law. Passage of SB 1643
would, for the calendar years beginning on or after January 1, 2007, and before
January 1, 2012, allow an exemption from those taxes for the gross receipts from the
sale of and storage, use, or other consumption of tangible personal property, as defined,
purchased for use by a qualified person engaged in the manufacturing, processing,
refining, fabricating, or recycling of property.
CITY COUNCIL STAFF REPORT
RE: SB 1643 (RUNNER)
APRIL 27, 2006
The City of Palm Desert opposes the removal of sales tax for any specified group
conducting business within the City and, therefore, the Legislative Review Committee
recommends that the City Council oppose SB 1643 and direct staff to prepare a letter
stating that position to appropriate legislators for the Mayor's signature.
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PATRI�IA SCULLY, CF�)
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SENATE BILL
Introduced by Senator Runner
February 24, 2006
No. 1643
An act to add and repeal Section 6377 of the Revenue and Taxation
Code, relating to taxation, to take effect immediately, tax levy.
LEGISLATIVE COUNSEL'S DIGEST
SB 1643, as introduced, Runner. Sales and use taxes: exemptions:
manufacturers.
The Sales and Use Tax Law imposes a tax on the gross receipts
from the sale in this state of, or the storage, use, or other consumption
in this state of, tangible personal property and provides various
exeinptions from the taxes iinposed by that law.
This bill would, for calendar years beginning on or after January 1,
2007, and before January l, 2012, allow an exemption from those
taxes for the gross receipts from the sale of, and the storage, use, or
other consumption of, tangible personal property, as defined,
purchased for use by a qualified person, as defined, engaged in the
manufacturing, processing, refining, fabricating, or recycling of
property, as specified.
This bill would take effect immediately as a tax levy.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
The people of the State of California do enact as follows:
1 SECTION l. Section 6377 is added to the Revenue and
2 Taxation Code, to read:
3 6377. (a) For calendar years beginning on or after January 1,
4 2007, there are exempted from the taxes imposed by this part the
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SB 1643
1 gross receipts from the sale of, and the storage, use, or other
2 consumption in this state of, any of the following:
3 (1) Tangible personal property purchased for use by a
4 qualified person to be used primarily in any stage of the
5 manufacturing, processing, refining, fabricating, or recycling of
6 property, beginning at the point any raw materials are received
7 by the qualified person and introduced into the process and
8 ending at the point at which the manufacturing, processing,
9 refining, fabricating, or recycling has altered property to its
10 completed fonn, including packaging, if required.
11 (2) Tangible personal property purchased for use by a
12 qualified person to be, used primarily in research and
13 development. �
14 (3) Tangible personal property purchased for use by a
15 qualified person to be used primarily to maintain, repair,
16 measure, or test any property described in paragraph (1), (2), or
17 (3).
18 (4) Tangible personal property purchased for use by a
19 contractor purchasing that property either as an agent of a
20 qualified person or for the contractor's own account and
21 subsequent resale to a qualified person for use in the performance
22 of a construction contract for the qualified person who will use
23 the tangible personal property as an integral part of the
24 manufacturing, processing, refining, fabricating, or recycling
25 process, or as a research or storage facility for use in connection
26 with the manufacturing process.
27 (b) This exemption does not apply to any tangible personal
28 property that is used primarily in administration, general
29 management, or marketing.
30 (c) For purposes of this section:
31 (1) "Fabricating" means to make, build, create, produce, or
32 assemble components or property to work in a new or different
3 3 manner.
34 (2) "Manufacturing" means the activity of converting or
35 conditioning property by changing the form, composition,
36 quality, or character of the property for ultunate sale at retail or
37 use in the manufacturing of a product to be ultimately sold at
38 retail. Manufacturing includes any improvements to tangible
39 personal property that result in a greater service life or greater
40 functionality than that of the original property.
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(3) "Primarily" ineans tangible personal property used 50
percent or more of the time in an activity described in
subdivision (a).
(4) (A) "Process" means the period beginning at the point at
which any raw materials are received by the qualified taxpayer
and introduced into the manufacturing, processing, refining,
fabricating, or recycling activity of the qualified taxpayer and
ending at the point at which the manufacturing, processing,
refining, fabricating, or recycling activity of the qualified
taxpayer 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 taxpayer's manufacturing, processing, refining,
fabricating, or recycling activity is conducted.
(B) Raw materials that are stored on premises other than
where the qualified taxpayer'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 property.
(6) "Qualified person" means any person that is both of the
following:
(A) A new trade or business. In deternuning whether a trade or
business activity qualifies as a new trade or business, the
following rules shall apply:
(i) In any case where a person purchases or otherwise acquires
all or any portion of the assets of an existing trade or business
(irrespective of the form of entity) that is doing business in this
state (within the meaning of Section 23101), the trade or business
thereafter conducted by that person (or any related person) shall
not be treated as a new business if the aggregate fair market
value of the acquired assets (including, real, personal, tangible,
and intangible property) used by that person (or any related
person) in the conduct of his or her trade or business exceeds 20
percent of the aggregate fair market value of the total assets of
the trade or business being conducted by the person (or any
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related person). For purposes of this subparagraph only, the
following rules shall apply:
(I) The determination of the relative fair market values of the
acquired assets and the total assets shall be made as of the last
day of the month following the quarterly period in which the
person (or any related person) first uses any of the acquired trade
or business assets in his or her business activity.
(II) Any acquired assets that constituted properiy described in
Section 1221(1) of the Internal Revenue Code in the hands of the
transferor shall not be treated as assets acquired from an existing
trade or business, unless those assets also constitute property
described in Section 1221(1) of the Internal Revenue Code in the
hands of the acquiring person (or related person).
(ii) In any case where a person (or any related person) is
engaged in one or more trade or business activities in this state,
or has been engaged in one or more trade or business activities in
this state within the preceding 36 months ("prior trade or
business activity"), and thereafter commences an additional trade
or business activity in this state, the additional trade or business
activity shall only be treated as a new business if the additional
trade or business activity is classified under a different division
of the Standard Industrial Classification Manual published by the
United States Office of Management and Budget, 1987 edition,
than are any of the person's (or any related person's) current or
prior trade or business activities in this state.
(iii) In any case where a person, including all related persons,
is engaged in trade or business activities wholly outside of this
state and that person first commences doing business in this state
(within the meaning of Section 23101) after December 31, 1993
(other than by purchase or other acquisition described in clause
(i)), the trade or business activity shall be treated as a new
business.
(iv) In any case where the legal form under which a trade or
business activity is being conducted is changed, the change in
form shall be disregarded and the determination of whether the
trade or business activity is a new business shall be made by
treating the person as having purchased or otherwise acquired all
or any portion of the assets of an existing trade or business under
the rules of clause (i).
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(v) "Related person" means any person that is related to that
person under either Section 267 or 318 of the Internal Revenue
Code.
(vi) "Acquire" includes any gift, inheritance, transfer incident
to divorce, or any other transfer, whether or not for consideration.
(B) Engaged in those lines of business described in Codes
2011 to 3999, inclusive, and Codes 7371 to 7373, inclusive, of
the Standard Industrial Classification Manual published by the
United States Office of Management and Budget, 1987 edition.
(7) Notwithstanding paragraph (6), "qualified person" shall
not include any person who has conducted business activities in a
new trade or business for three or more years.
(8) "Recycling" means using, reusing, or reclaiming a
recyclable material to produce new or recycled property.
(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 promulgated under that section.
(11) "Tangible personal property" does not include any of the
following:
(A) Consumables with a normal useful life of less than one
year, except as provided in subparagraph (E) of paragraph (11).
(B) Furniture, inventory, equipment used in the extractlon
process, or equipment used to store finished products that have
completed the manufacturing process.
(12) "Tangible personal property" includes, but is not limited
to, all of the following:
(A) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.
(B) All equipment or devices used or required to operate,
control, regulate, or maintain the machinery, including, without
limitation, computers, data �rocessing equipment, and computer
software, together with all repair and replacement parts with a
useful life of one or more years, whether purchased separately or
in conjunction with a complete machine and regardless of
whether the machine or component parts are assembled by the
taxpayer or another party.
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SB 1643 — 6 —
1 (C) Property used in pollution control that meets or exceeds
2 standards established by this state or any local or regional
3 governmental agency within this state.
4 (D) Special purpose buildings and foundations used as an
5 integral part of the manufacturing, processing, refining, or
6 fabricating process, or that constitute a research or storage
7 facility used during the manufacturing process. Buildings used
8 solely for warehousing purposes after completion of the
9 manufacturing process are not included.
10 (E) Fuels used or consumed in the manufacturing process.
11 (F) Property used in recycling.
12 (d) No exemption is allowed under this section unless the
13 purchaser furnishes the retailer with an exemption certificate,
14 completed in accordance with any instructions or regulations as
15 the board may prescribe, and the retailer subsequently furnishes
16 the board with a copy of the exemption certificate. The
17 exemption certificate shall contain the sales price of the
18 machinery or equipment that is exempt pursuant to subdivision
19 (a).
20 (e) Notwithstanding any provision of the Bradley-Burns
21 Uniform Local Sales and Use Tax Law (Part 1.5 (commencing
22 with Section 7200)) or the Transactions and Use Tax Law (Part
23 1.6 (commencing with Section 7251)), the exemption established
24 by this section does not apply with respect to any tax levied by a
25 county, city, or district pursuant to, or in accordance with, either
26 of those laws.
27 (� (1) Notwithstanding subdivision (a), the exemption
28 provided by this section does not apply to any sale or use of
29 property which, within one year from the date of purchase, is
30 either removed from California or converted from an exempt use
31 under subdivision (a) to some other use not qualifying for the
32 exemption.
33 (2) The exemption established by this section does not apply
34 with respect to any tax levied pursuant to Sections 6051.2 and
35 6201.2, or pursuant to Section 35 of Article XIII of the California
36 Constitution.
37 (g) If a purchaser certifies in writing to the seller that the
38 property purchased without payment of the tax will be used in a
39 manner entitling the seller to regaxd the gross receipts from the
40 sale as exempt from the sales tax, and within one year from the
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date of purchase, the purchaser (1) removes that property outside
California, (2) converts that properiy for use in a manner not
qualifying for the exemption, or (3) 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 property at
the time the property is so removed, converted, or used, and the
sales price of the property to the purchaser shall be deemed the
gross receipts from that retail sale.
(h) This section applies to leases of 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 applies to the rentals payable pursuant
to a lease, provided the lessee is a qualified person and the
property is used in an activity described in subdivision (a).
Rentals that meet the foregoing requirements are eligible for the
exemption for a period of six years froin the date of
commencement of the lease. At the close of the six-year period
from the date of commencement of the lease, lease receipts are
subject to tax without exemption.
(i) This section shall remain in effect only until January 1,
2012, and as of that date is repealed.
SEC. 2. This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
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