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Partial Sales and Use Tax Exemption on Manufacturing and Research and Development Equipment in California

On July 1, 2014, a new California tax incentive went into effect. The provision allows certain companies involved in manufacturing and research and development, a partial exemption of sales and use tax on the purchase or lease of equipment used in the manufacturing process. The reduction is from the state tax rate of 7.5% down to 3.3125%.

This new initiative could significantly reduce sales tax on any qualified purchase. These purchases include machinery and equipment; equipment and devices used or required to operate, control, regulate, or maintain the machinery; pollution control items; and certain special purpose buildings and foundations.

Who qualifies?

• “Qualified Person” or entity who is primarily engaged (50 percent or more of the time) in certain types of business which may include but not limited to all forms of manufacturing, research and development (“R&D”) in biotechnology, and R&D in physical, engineering, and life sciences
• A qualified person means a person or entity who is primarily engaged (50 percent or more of the time) in those line of business listed in the North American Industry Classification System (NAICS) under Codes 3111 to 3399 and R&D NAICS Codes 541711 and 541712

What property Qualifies?

• Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures
• Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process
• Pollution control devices

The exemption excludes: consumables with a useful life of less than one year or any property used to store finished product or property used in administration, management or marketing activities. The exemption is also limited to the first $200 million of purchases made by the qualified person during a calendar year

How does the property need to be used? (50% or more in the following activities)

• Any stage of the manufacturing, processing, refining, fabrication or recycling process
• Research and Development
• To maintain, repair, measure, or test any qualified tangible personal property

Required documentation:

• Properly completed partial exemption certificate

The Board of Equalization has a page devoted to the exemption here.

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