The California legislature sent Gov. Gavin Newsom a bill that would exempt manufacturers from paying sales and use taxes on equipment purchases for five years.
AB 1951 now awaits the governor’s signature or veto.
Under the bill, passed by the Assembly and Senate on Aug. 25, the sales and use tax exemptions will apply to equipment purchases of up to $200 million annually per company.
The exemption would last from Jan. 1, 2023, through the end of 2027, and sunset on Jan. 1, 2028. At that time, the exemption would revert to the existing partial exemption.
California has the highest state-level tax rate in the country, and once local rates are accounted for sales and use tax rates can reach as high as 10.8%, according to the bill.
Nationwide, 38 states fully exempt manufacturing equipment from sales and use tax.
“With California’s current partial exemption, taxpayers pay more to buy equipment in California than they would elsewhere, creating a competitive disadvantage for the state,” the bill said. “It is the intent of the legislature to expand the sales and use tax exemption for manufacturing and research and development equipment to preserve California’s status as a hub of innovation and technology and encourage greater investment in California,” the bill added.
According to a newsletter from the California Taxpayers Association, a co-sponsor of the bill, the Senate voted 30-3 on Aug. 25 and sent the bill to the Assembly for a vote on amendments made in the Senate. The Assembly voted 69-0 to concur with the amendments.
In bringing the bill to the Senate, Sen. Bob Hertzberg, (D-Van Nuys) mentioned the number of states that have exemptions.
“This year and last year, we’ve had an unbelievable surge in revenues,” Hertzberg said, according to the CalTax newsletter distributed on Aug. 26. “Those surges in revenues are informed by the IPOs and other economic activity, but the base of what we’re about is manufacturing. We have to deal with manufacturing. And 70% of these manufacturing [employers] have less than 20 people.”
The Assembly voted after a brief presentation by Assemblymember Timothy S. Grayson (D-Concord), the lead sponsor of the bill. Grayson noted that the Senate amendments were technical in nature. The legislation is supported by a long list of groups representing a broad range of industries in California, the CalTax newsletter said.
The California Manufacturers & Technology Association is among them.
Lance Hasting, the chief executive of the Sacramento-based advocacy group, said that the vote by the lawmakers shows manufacturers worldwide that California is serious about attracting and retaining high-quality jobs.
“Our state is a world leader in innovation, yet we are significantly behind in investment,” Hastings said in a statement. “Our companies struggle to purchase new equipment because of the high cost of scaling up production. AB 1951 will allow our manufacturers to contemporize their facilities and partner with state and local governments to reach California’s goals of a more sustainable economy.”
The California State Association of Counties, however, came out against the bill and said that its passage would cost more than $2 billion over a five-year period.
“While counties support California’s manufacturing industry generally and through local-option infrastructure incentives, AB 1951 would impose a one-size-fits-all approach and would have devastating consequences for local governments by eroding the sales and use tax base,” the posting said.
“Local governments — and counties in particular — would ultimately bear the responsibility of absorbing these cuts,” the posting concluded.
The bill’s language states that “no appropriation is made by this act and the state shall not reimburse any local agency for any sales and use tax revenues lost by it under this act.”
