A new law beginning on July 1, 2014 allows manufacturers to obtain a partial exemption of sales and use tax on certain manufacturing and research and development equipment purchases. To be eligible under this law, you must meet all three of these conditions:
- Be engaged in certain types of business, also known as a “qualified person.”
- Purchase “qualified property.”
- Use that qualified property for the uses allowed by this law.
How much sales or use tax is exempt?
The partial exemption applies only to the state sales and use tax rate portion, currently at 4.1875 percent. The exemption does not apply to any local, city, county, or district tax.
What is a qualified person?
A “qualified person” is someone primarily engaged in one of the following types of business:
- Any form of manufacturing;
- Research and development in biotechnology, engineering, physical sciences, or life sciences.
What property qualifies for the exemption?
Generally, qualified property includes:
- Machinery and equipment, including component parts and contrivances.
- Equipment or devices used or required to operate, control, regulate, or maintain the machinery.
- Tangible personal property used in pollution control that meets established state or local government agency standards.
- Special purpose buildings and foundations used as an integral part of the manufacturing process, or that constitute a research or storage facility. Buildings used solely for warehousing do not qualify.
Am I required to use the qualified property in certain ways?
Yes. To be eligible, the property must be purchased for any of the following uses:
- Manufacturing, processing, refining, fabricating, or recycling of tangible personal property,
- Research and development.
- To maintain, repair, measure or test property listed in 1 or 2 above.
- By a contractor, purchasing property for use in the performance of a construction contract for a qualified person, who will use the property as part of the manufacturing, processing, refining, fabricating, or recycling process, or in research and development.
Where can I find more information?
BOE staff is developing a proposed regulation for consideration by elected Board members to help businesses understand what manufacturing equipment qualifies for the sales tax exemption. To receive copies of future discussion papers, including drafts of the proposed regulation, ask to be added to the list of interested parties at: firstname.lastname@example.org
When does the program go into effect?
The partial exemption applies to qualifying purchases made on or after July 1, 2014 but before July 1, 2022.
What is the maximum exemption amount a taxpayer can obtain?
The law provides that a single taxpayer can obtain up to $200 million in exempt purchases per calendar year.
If a taxpayer's full exemption amount is not used in one year, may it be carried over to the following year?
No. The sales tax exemption cannot be carried forward to a following year. The exemption amount is limited to $200 million per calendar year regardless of the maximum exemption not being obtained in a prior year.
Is this program only available in specific regions of the state?
No. This new program applies the exemption to qualifying purchasers throughout California, without regard to geographic boundaries.
What is the partial exemption rate?
The partial exemption applies only to the state portion of the sales and use tax rate, currently 4.1875 percent. The partial exemption provides that sales of the qualifying property sold to a qualified person be taxed at a rate of 3.3125 percent (7.50 percent current statewide tax rate – 4.1875 percent partial exemption) plus any applicable district taxes.
Can the local government portion of the sales and use tax be exempted?
No. The partial exemption does not apply to any tax levied by a county or city pursuant to, or in accordance with the Bradley-Burns Uniform Local sales and Use Tax Laws; or to any tax levied by a district, pursuant to, or in accordance with the Transactions and Use Tax Law.
What documentation do I need to support the exempt sale?
In order to document the partially exempt sale, you need to obtain a timely exemption certificate from your customer. The certificate should include:
- the date;
- the signature of the purchaser, the purchaser's agent, or the purchaser's employee;
- the name and address 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 description of the property purchased under the certificate; and
- a statement of the manner in which or the purpose for which the property will be used so as to make the sales tax inapplicable to the sale.
Invoices on sales claimed by a seller as exempt should specify the names of the purchasers in order to relate them to exemption certificates.
Who qualifies for the partial exemption?
The partial exemption applies to "qualified persons." A "qualified person" means a person who is primarily engaged (50 percent 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 published by the United States Office of Management and Budget (OMB), 2012 edition.
These industries generally include those primarily engaged in the business of all forms of manufacturing, research and development in biotechnology, and research and development in the physical, engineering, and life sciences.
What property qualifies for the partial exemption?
To qualify for the partial exemption, the property needs to be "qualified tangible personal property" purchased for use by a "qualified person" to be used "primarily" (50 percent or more) in any stage of the following activities:
- Manufacturing, processing, refining, fabricating, or recycling of property.
- Research and development.
- Maintaining, repairing, measuring, or testing property used in manufacturing, processing, refining, fabricating, recycling, research and development.
"Qualified tangible personal property" also includes tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person, that will use that 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.
"Qualified tangible personal property" includes, but is not limited to:
- 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 governmental 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.
"Qualified tangible personal property" does not include:
- Consumables with a useful life of less than one year.
- Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
- Tangible personal property used primarily in administration, general management, or marketing.
Is the partial sales and use tax exemption program industry specific?
Yes, you must be a "qualified person" to obtain the exemption and the property must be "qualified tangible personal property" as defined above.
How do I apply for the exemption?
There is no need to apply for the exemption. When purchasing items subject to the partial exemption, you must furnish the retailer with a timely exemption certificate. See "What documentation do I need to support the exempt sale?" for details of what the certificate must contain.
Based on my business' primary NAICS code (e.g. manufacturing) it is eligible for the exemption. Are purchases made for the other activities of my operations (i.e. distribution center, sales/call center) eligible for the exemption as well?
No. Purchase of equipment for other parts of the business operation such as the distribution center and sales center is not eligible for the exemption.
Are operation support equipment (i.e. computers, tablets, printers, servers) used to run the manufacturing equipment eligible under this program?
Yes. The law provides that purchases of operation support equipment are eligible under this program provided they are used for the qualifying activities stated above.
Is leased equipment included in the exemption?
Yes. The exemption also applies to leases of qualified tangible personal property classified as "continuing sales" and "continuing purchases" in accordance with Regulation 1660, Leases of Tangible Personal Property – In General, provided the lessee is a qualified person and the property is used in a qualified activity.
Which stages of the manufacturing process are included?
"Process" means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabrication, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging.
If I purchased equipment prior to July 1, 2014, can I receive this sales and use tax exemption?
No. The partial exemption is not retroactive.
How is this program different from the SB1128/SB71 California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Sales and Use Tax Exclusion program at the Treasurer's Office?
|Manufacturer's Partial Exemption||SB1128/SB71 CAEATFA Sales and Use Tax Exclusion|
|Eligible Participants||All manufacturers described in NAICS codes 3111 to 3399, 541711, or 541712||Companies that design, manufacture, produce or assemble advanced transportation technologies or alternative source products, components or systems|
|Exempt Tax Rate||State portion only, currently at 4.1875 percent||Full rate including local and district taxes|
|Application requirements||None||Participants must apply with CAEATFA and be approved for a "project" for the exclusion to apply. The property purchased must be included approved "project."|
|Fee requirements||None||Applicants are subject to an application and administration fee|
By participating in this program can my business also participate in the Treasurer's CAEATFA Sales and Use Tax Exclusion program to exclude the rest of the sales tax?
Yes. If you are accepted into the CAEATFA program, you may also take advantage of the manufacturer's exemption where appropriate. Generally the CAEATFA sales and use tax exclusion will take precedence over the manufacturer's exemption for property that is considered a "project" under the CAEATFA program. This is to your benefit since you will obtain the exclusion for the full sales and use tax rate.
You may not provide an exemption certificate for both the CAEATFA exclusion and the manufacturer's exemption for the same property. If you purchase property that is not considered part of a "project" under the CAEATFA program, but still qualifies for the manufacture's exemption, you may provide an exemption certificate for the partial exemption.
Please click here for more information on the CAEATFA program.