John Ambroseo, chief executive of Santa Clara-based Coherent, speaking on behalf of the Silicon Valley Leadership Group, argues that the state tax exemption is needed to make California competitive with most other states that don’t tax manufacturing purchases on the theory that products are “double-taxed” when the businesses then sell the products they make.
But wait a minute, isn’t sales tax by definition “double-taxation”? When you go to work and get your paycheck, what is taken out? Taxes. So when you go to the store to buy what you need, aren’t you being “double-taxed” when the cashier charges the sales tax on those pair of shoes? Why isn’t Elaine Alquist asking that ordinary folk get their own sales tax exemption?
Now Elaine claims in her letter in the 4/21/2006 issue of the Mountain View Voice that SB1291 would
simply would ensure that California manufacturers would not be “double taxed” on both the “inputs” and the “outputs” of their equipment and products
it seemed worth a deeper look at the language of the bill.
Section I, reads in part:
6377. (a) … there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of:
(1) Tangible personal property that will become … tangible personal property manufactured, processed, fabricated, or used in research and development activities.
(2) Tangible personal property directly used or consumed in … research and development of tangible personal property:
(A) The product being … or used in a research and development activity.
(B) Any intermediate or preliminary product that will [be] used in a research and development activity.
(9) …used in performing research and development activities.
Wow, reading the list, it is hard to imagine some activity that is not covered by this sales tax exception. “Research and development” covers practically any and all activities a company could engage in. But what does “research and development” cover in Elaine’s bill:
(6) “Research and development” means those described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(c) For purposes of this section, all of the following apply:
(1) The production of a publication for the dissemination of news of a general character and of a general interest that is printed on newsprint and distributed to the general public at a daily, weekly, or other short intervals is considered manufacturing.
So apparently printing the SJ Mercury and company newsletters is considered “research and development”.
(2) The manufacturing or research and development of computer software.
Anything related to writing a computer program. I sense lots of software engineers becoming “businesses” for this massive loophole.
(3) “Semiconductor, pharmaceutical or biotechnology fabrication clean rooms and equipment” means all tangible personal property, … used in connection with the manufacturing, processing,
fabrication, or research and development … of a semiconductor, pharmaceutical, or biotechnology product, without regard to whether the property is actually contained in the clean room environment.
So all Intel has to do is claim that the purchase has something to do with a clean room and they get a tax break. And a side note here: you really have to admire the balliesness to claim a tax deduction for “clean room” equipment that isn’t in the clean room. This sounds like something a creative tax accountant could really have fun with.
It gets even better, lets look at the some of the other sections:
“Research and development” includes integrated systems, fixtures, and piping, all property necessary or adapted to reduce contamination or to control airflow, temperature, humidity, chemical purity, or other environmental conditions or manufacturing or research and development tolerances, and production equipment and machinery.
So software, biotech, semiconductor companies all get a major sales tax. Reading deeper, the is hard to imagine any industry that wouldn’t be exempt.
So what would this cost? Well the earlier version, SB552, which in many cases is word for word identical, the Legislative Analyst issued this report:
immediately putting the state back into a deficit position to the extent of some $10 billion (three times $3.2 billion plus interest). In other words, this bill might put the state into a permanent deficit position
Sounds to me like a lot of social programs would be cut.
Lets look at some of the other tasties:
(10) Tangible personal property used … if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws, or rules and regulations that establish requirements related to public health.
(11) Tangible personal property specifically installed to do any of the following:
(A) Reduce water use and wastewater flow volumes from the manufacturing, processing, fabrication, research and development or repair operation.
(B) Reuse and recycle wastewater streams generated within the manufacturing, processing, fabrication, research and development or repair operation.
So basically, the Silicon Valley Leadership Group is asking that their members get a tax exemption for equipment that is required to obey the law.
When was the last time that you were paid to obey the law? Do you tell the police officer that you didn’t stop for the stop sign because you were not paid to stop for it? I thought that obeying the law was required because it … ummm .. is the law?
I sense a Leona Helmsley moment:
“Only little people pay taxes.”