New Tax Exemption On Manufacturing Equipment For California Businesses

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.

What is a Qualified Person?

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. 

What Items Qualify For The Exemption?

Items qualifying for the exemption under Governor Brown’s “Economic Development Initiative” includes:

• Machinery
• Equipment and component parts, including 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.
• Repair and replacement parts with a useful life of one or more years,
• Pollution control equipment that meets standards established by the state or any local or regional governmental agency within the state.
• Special purpose buildings and foundations used in manufacturing.

Items that are excluded

The sales tax exemption excludes the following items:

• 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.

The exemption is also limited to the first $200 million of purchases made during a calendar year. 

Required Documentation

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:

• 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 to be used primarily for a qualifying activity, or for use by a contractor performing a construction contract for a qualified person.
• A statement that the purchaser is a qualified person primarily engaged in manufacturing or research and development in biotechnology or physical, engineering, and life sciences, or 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 the execution of the document.

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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