A new California law, effective July 1, 2014, allows manufacturers and certain companies that perform research and development to obtain a partial exemption of sales and use tax. The exemption will apply to purchases of manufacturing and research and development equipment and will allow purchasers of this equipment to pay California sales tax at a reduced rate of 3.3125%. The California state sales tax rate is currently 7.5%. The partial exemption does not apply to any applicable district taxes. To be eligible, a company must meet all three of the following conditions:
- Be engaged in certain types of business (qualified person)
- Purchase qualified property
- Use that qualified property for the uses allowed by the exemption
- A “qualified person” means a person who is primarily engaged in those lines of businesses described in the North American Industry Classification System Codes 3111 to 3399, inclusive, 541711 or 541712 published by the United States Office of Management and Budget.
- "Primarly engaged” means 50% or more of gross revenues, including inter-company and intra-company charges, are derived from the qualifying manufacturing activity for the preceding financial year.
- "Primarly engaged” for purposes of research and development means 50% or more of the expenses are for such qualifying research and development activities for the preceding financial year.
Qualified Tangible Personal Property
- Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts and operating structures.
- Equipment or devices used or required to operate, control, regulate or maintain the machinery, including, but not limited to, computers, data processing 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 qualified person or another party.
- Tangible personal property used in pollution control that meets standards established by this state or any local or regional government agency within this state.
- Special-purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating or recycling process, or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included.
- Leases of qualified personal property may also qualify for the partial exemption.
- The tangible personal property must be used primarily in one of the following manners:
- Any stage in the manufacturing, processing, refining, fabricating or recycling process
- Research and development
- To maintain, repair, measure or test any qualified tangible personal property
- For use by a contractor purchasing the property for use in the performance of a construction contract for a qualified person, provided that the qualified person will use the resulting improvement to real property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process or as a research or storage facility for use in connection with those processes.
For purposes of the exemption, the manufacturing process begins from the point you receive raw materials and introduce them into the manufacturing, processing, refining, fabricating, or recycling activity and ending at the point at which the activity has altered the product to its completed form, including packaging if required.
The law further provides that a single taxpayer or combined reporting unit cannot exceed $200 million in purchases subject to the partial exemption in a calendar year. The partial exemption is set to expire on July 1, 2022. To explore the new law, or to contact California's Board of Equalization, visit their Manufacturing Exemption webpage.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.