We are just a few short months away from a unique new business opportunity available to some California companies. In an effort to fuel growth in the manufacturing sector of the state economy, California Governor Jerry Brown, as part of his Economic Development Initiative, signed legislation enacting a sales and use tax exemption for equipment used in manufacturing and research and development (R&D) activities.
The legislation will go into effect on July 1, 2014, and will provide cost savings for large manufacturing equipment purchases. The exemption applies to “qualified tangible personal property” purchased by a “qualified person” as defined by the law.
The partial exemption rate is 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.
Under this legislation, a “Qualified person” is defined as a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, and R&D NAICS codes 541711 and 541712. Examples of types of manufacturing companies represented by the applicable NAICS codes include R&D in biotechnology, physical engineering, and life sciences. The qualified property must be used primarily in manufacturing or R&D. The exemption also applies to contractors that purchase qualified property for a construction contract with a manufacturer or R&D business.
Items qualifying for the exemption under Governor Brown’s “Economic Development Initiative” includes:
Items that are excluded
The sales tax exemption excludes the following items:
The exemption is also limited to the first $200 million of purchases made during a calendar year.
Beginning next month, there will be two sample certificates available on the California Board of Equalization website for the exemption, one for general purchases and one for construction contractors.
You may provide the certificate for each purchase, or you may issue blanket certificates.
If you use a blanket certificate, you must identify transactions that qualify for the partial exemption by making a clear reference to the blanket certificate on each document such as a written purchase order, sales agreement, lease, or other contract. These documents that reference the blanket exemption certificate must include a description of the property being purchased.
Any document may be regarded as a partial exemption certificate as long as it contains the following:
Qualified California businesses with manufacturing or R&D operations should prepare to take advantage of the opportunity offered by the exemption. The exemption does not apply to local sales and use tax. Please use this link from the California Board of Equalization to find further details about this new state program.
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