California Provides Tax Break Aimed at Aiding Lithium Developers

Additional funding for sales tax exclusions is intended to promote the exploration and extraction of California’s lithium deposits, a critical component in batteries for zero-emissions vehicles.

Governor Gavin Newsom signed into law legislation to fund tax exclusions for alternative energy projects under the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA). A.B. 2887 increases the total amount available each year for sales and use tax exclusions for equipment used in alternative energy and transportation projects from $100 million to $150 million until January 1, 2026. The bill takes effect immediately and does not reimburse local authorities for lost tax revenues. While the law does not mention lithium, floor analyses of the bill state that the additional funding is intended to assist in the exploration and extraction of California’s lithium deposits.

Lithium and EVs

Lithium is a metal used to produce batteries in electric vehicles and computer electronics. Currently, the global supply of lithium comes from Argentina, Chile, China and Australia. California’s lithium deposits are seen as critical for both helping the U.S. become a global lithium producer and in developing an in-state supply chain for the state’s move to zero-emission vehicles (ZEVs). (For background, see All New Cars Sold in California Must be ZEVs by 2035 and see California Taxes Lithium, a Key Component in EV Batteries.)

CAEATFA has developed a list of Emerging Strategic Industries that includes activities associated with the development, exploration, and production of lithium within California’s “Lithium Valley.” These industries are identified as having a potentially significant impact on the state’s environmental goals or economy.

CAEATFA

The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) was established in 1980 to finance renewable energy projects. Its authority was expanded in 1994 to fund “advanced transportation” projects. In 2008, CAEATFA implemented an existing sales tax exclusion for equipment used to manufacture advanced transportation products. The 2008 exclusion largely benefited Tesla Motors.

The legislature then authorized the sales tax exclusion program with the passage of S.B. 71 in 2010. The law expanded that exclusion to alternative energy manufacturers by authorizing a $100 million exclusion from sales tax for projects that “promote the creation of California-based manufacturing, California-based jobs, the reduction of greenhouse gases, or reductions in air and water pollution or energy consumption.” CAEATFA has awarded the full $100 million each year since 2015.

In December 2018, the Legislative Analyst’s Office (LAO) issued an evaluation of the CAEATFA tax exclusion program and recommended that the state allow it to expire. The LAO noted that the CAEATFA program and the partial sales tax exemption for manufacturing and research and development activities overlap. It concluded that the partial manufacturing exemption is broader than the CAEATFA program and easier for businesses to use.