It's not uncommon for new legislation to bring about changes that can impact taxpayers. Currently, a piece of legislation known as Assembly Bill 52 (AB 52), put forward by Assemblyman Grayson, is under review in the California Senate. The bill introduces a new tax credit with the objective of encouraging enduring investments and fostering growth in California's manufacturing sector. However, a notable limitation exists in the proposed bill: the new tax credit does not permit taxpayers to lower their standard tax beneath the provisional minimum tax. This limitation is a frequent occurrence in bill drafting and is an issue that supporters of AB 52 aim to rectify.

Background

The problem arises from a stipulation that is frequently incorporated into the wording of bills as an exception to the credit limitation sections. This stipulation is generally found in Section 17039(c)(1) under the Personal Income Tax Law and Section 23036(d)(1) under the Corporation Tax Law. Regrettably, legislators often miss the need to implement laws that lift this limitation when suggesting new tax credits. This oversight then necessitates subsequent "clean-up" legislation for rectification. A recent instance of this was the enactment of the Elective Pass-Through Entity Tax and Tax Credit as part of the state’s 2021 budget. The subsequent year, in SB 113 (Ch. 22-3), legislators adjusted the credit to allow it to lower standard tax beneath the provisional minimum tax.

Current Status of AB 52

As of now, AB 52 is under consideration in the California Senate. If passed, this bill would grant eligible entities a state income or franchise tax credit equivalent to the local portion of their sales and use tax (SUT) paid on purchases of eligible manufacturing and research and development (R&D) equipment. This credit would be applicable to purchases that were partially exempt under the existing SUT exemption, commencing with the 2024 tax year.

The intention behind AB 52 is to further encourage enduring investments and foster growth in California's manufacturing sector. This aligns with the partial (state-only portion) SUT exemption, which has been fostering growth in the industry since its inception on July 1, 2014.

Comparison with Other States

The tax credit suggested in AB 52 would align California more closely with 38 other states that offer a full SUT exemption for eligible manufacturing and R&D purchases. This is noteworthy given that California's state and local sales tax rates are among the highest in the nation. While the state sales tax rate is 6%, the combined rate can reach up to 10.75% when local portions of the sales tax are included.

By proposing this tax credit, California aims to create a level playing field and make the state more appealing for businesses in the manufacturing and R&D sectors.

Details of the Tax Credit

The tax credit suggested in AB 52 is intended to apply to the same tangible personal property for which the partial exemption is claimed. This includes, but is not limited to, machinery and equipment, and certain special purpose buildings.

The bill proposes a credit against taxes to a taxpayer in an amount equivalent to the amount of tax reimbursement paid during the taxable year for sales tax on gross receipts that would be exempt from taxation under the Sales and Use Tax Law. Additionally, the bill suggests a similar tax credit against those taxes to a taxpayer in an amount equivalent to the amount of use tax paid during the taxable year for storage, use, or other consumption.

How Paramount Property Tax Appeal Can Help with AB 52

Conclusion: The Potential Impact of AB 52 and Next Steps

The passage of AB 52 could have a significant impact on California's economy and the manufacturing industry. By providing a tax credit equivalent to the local portion of the sales and use tax paid on qualifying purchases, the bill aims to stimulate long-term investments and growth in the manufacturing and R&D sectors. This could lead to increased economic activity, job creation, and innovation within the state.

Furthermore, by aligning California's tax policy more closely with that of other states that offer a full SUT exemption for qualified manufacturing and R&D purchases, AB 52 could make the state more competitive in attracting and retaining businesses in these sectors.

However, the bill is currently still pending in the California Senate, and it remains to be seen whether it will be passed into law. If it is, the new tax credit would apply to purchases made starting with the 2024 tax year.

As we await further developments, it's crucial for businesses and property owners to stay informed and prepared. At Paramount Property Tax Appeal, we're committed to helping our clients and take full advantage of any new opportunities that may arise.

Remember, in the ever-changing landscape of tax law, staying informed and proactive is key to optimizing your tax strategy.