New California Sales Tax Exemption for Manufacturers and R&D
California has passed a new sales tax exemption which was signed into law by Governor Brown as part of Assembly Bill 93 and Senate Bill 90. It makes sweeping changes to the enterprise zone credit regime, but more importantly, businesses can now quality for a sales tax exemption on qualifying items purchased. Considering this newly passed exemption, qualified persons or businesses would only pay 3.3125% of the statewide sales and use tax. This is a savings of approximately $42 for every $1,000 spent on qualifying property.
General Qualification Items
Beginning on July 1, 2014, California allows manufacturers and certain research and developers to obtain a partial exemption of sales and use tax on certain manufacturing and research and development equipment purchases and leases.
To be eligible under this law, you must meet all three of these conditions:
1. Be engaged in certain types of business, also known as a “qualified person.”
A “qualified person” means a person who is primarily engaged (50% or more of the time) in those lines of business described in the North American Industry Classification System (NAICS) Codes 3111 to 3399, inclusive, 541711, or 541712.
2. Purchase “qualified property.” Qualified Tangible Personal Property
“Qualified tangible personal property” includes, but is not limited to:
• Machinery and equipment, including components.
• 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.
• Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency.
• 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.
3. Use that qualified property for the uses allowed by this law.
The tangible personal property must be used primarily (more than 50% of the time) in one of the following manners:
• Any stage of the manufacturing, processing, refining, fabricating or recycling process.
• Research and development.
• To maintain, repair, measure or test any qualified tangible personal property described by the above, or
• For use by a contractor purchasing that 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.
The manufacturing process begins from the point you receive raw materials and introduce them into the manufacturing, processing, refining, fabricating or other process.
Information Pertaining to Sellers and Required Documentation
A sale occurs at the time title or possession of the property transfers to the buyer regardless of when a purchase order is issued or payment is made (unless the terms of the sale expressly provide otherwise).
The partial exemption rate is currently 4.1875%. You can look up tax rates by city, county or address on the SBOE website.
In order to document the partially exempt sale, you need to obtain a timely exemption certificate from your customer. There are samples of these certificates that can be accessed at the SBOE website.
Any document may be regarded as a partial exemption certificate as long as it contains the following:
• The signature of the purchaser, the purchaser’s agent or the purchaser’s employee;
• The name, address and telephone number of the purchaser;
• The purchaser’s seller’s permit number, or if the purchaser is not required to hold a seller’s permit, a notation to that effect and the reason;
• A statement that the property purchased is:
o To be used primarily for a qualifying activity, or
o For use by a contractor performing a construction contract for a qualified person
• A statement that the purchaser is:
o A qualified person primarily engaged in manufacturing or research and development in biotechnology or physical, engineering and life sciences, or
o A contractor performing a construction contract for a qualified person.
• A statement that the property purchased is qualified tangible personal property
• A description of the property purchased
• the date of execution of the document
For Purchasers and Required Documentation
There is no need to apply to the BOE for the exemption. When you make qualifying purchases or leases, you must provide the seller with a timely partial exemption certificate to obtain the reduced tax rate. As discussed above, there are samples of these certificates that can be accessed at the SBOE website.
The requirements for the partial exemption certificate should contain the same information as highlighted above for the sellers in “Required Documentation.”
The information contained in this article is not all-inclusive. If you believe that you qualify for this exemption, please contact your White Nelson Diehl Evans service provider to discuss the details of your situation.