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California Partial Sales Tax Exemption for Manufacturing and R&D Equipment

posted Apr 30, 2014, 5:53 PM by Stacie Clifford Kitts   [ updated Apr 30, 2014, 5:55 PM ]

A new California sales tax exemption that goes into effect later this year will generate significant savings for eligible businesses. California taxpayers engaged in manufacturing and certain types of research and development will pay a reduced sales and use tax rate of 3.3125% on qualifying equipment purchases. The exemption is effective on qualifying purchases on or after July 1, 2014, so eligible businesses should plan their equipment purchases accordingly to take advantage of the exemption.

Overview

Due to the enactment of S.B. 90 in the summer of 2013, California will allow businesses primarily engaged in manufacturing or in research and development ("R&D") in the fields of biotechnology or the physical, engineering and life sciences to purchase or lease manufacturing or R&D equipment at a reduced sales and use tax rate for purchases occurring on or after July 1, 2014. The partial exemption will reduce the state sales tax rate from 7.5% to 3.3125%.

"Qualifying tangible personal property" generally includes machinery and equipment and certain other items purchased for use in any stage of manufacturing or R&D activities including equipment used to operate, regulate or maintain the machinery, such as computers and items used in pollution control and any special purpose buildings integral to the manufacturing process. The exemption will also apply to property purchased by contractors for use in construction contracts that are integral to manufacturing and R&D activities. The exemption will not apply to consumables; 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. Items used primarily in administration, general management, or marketing also are ineligible for the exemption. Note that a single taxpayer or combined reporting unit is limited to $200 million in exempt purchases per calendar year. The exemption is set to expire on June 30, 2022.      

There are no application requirements or any fee requirements. Sellers of qualifying property will have to obtain a timely exemption certificate from the purchaser. According to Special Notice L-372, the California State Board of Equalization ("BOE") will have exemption certificates available on its website by July 2014. Additionally, the BOE is developing a regulation that will provide further guidance on which equipment qualifies for the exemption.

See http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Overview for more information on the exemption.

Observations

This partial exemption will be a significant benefit to taxpayers in California that primarily engage in manufacturing and R&D activities. Eligible purchasers will be able to take advantage of a 4.1875% rate reduction in state sales tax. Note that the exemption will not apply to local city, county or district taxes. For example, In Los Angeles, California, the combined state and local tax rate is 9%. Therefore, after factoring the exemption, the combined state and local sales and use tax on the purchase of qualified property is 4.8125%.

Currently, taxpayers are not allowed any exemption (full or partial) on the purchase of machinery and equipment and other non-consumable tangible personal property that it uses in its manufacturing and R&D activities unless those items were incorporated into the finished manufactured article. Given the significant benefits associated with the partial exemption, we recommend that eligible taxpayers delay purchases of qualified tangible personal property until July 1, 2014, if feasible, to take advantage of the reduced state sales and use tax rate.

 

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