State and Local Tax (SALT) | | Mar 20, 2014
Last Summer California enacted a new law allowing a partial sales tax exemption for certain manufacturing and research and development purchases. California is trying to level the competitive playing field with many other states that have exemptions already in place.
Certain manufacturing businesses, as well as firms engaged in research and development activities, will be able to purchase or lease manufacturing equipment at a reduced state sales tax rate of 3.3125% plus applicable district taxes. When making a qualifying purchase, the taxpayer must provide the seller with a properly executed exemption certificate which will be able on Board of Equalization’s website before the law goes in effect on July 1, 2014. Qualifying purchases cannot exceed $200 million in a calendar year for one reporting entity and must be used within one year from the purchase date.
In order to qualify for the exemption, the taxpayer must be primarily engaged in either any form of manufacturing as described in the NAICS Codes 3111 and 3399 or research and development in biotechnology, physics, engineering, and life sciences described in NAICS codes 641711 or 541712. The reduced sales tax rate applies to “qualified tangible personal property” which includes:
- Machinery and equipment, including components parts and contrivances
- Equipment used to operate, regulate, or maintain the machine, including computers, data processing equipment and software
- Tangible personal property used in pollution control
- 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 those processes (but excluding buildings used for warehousing).
Purchases not qualified include consumables with a useful life of less than a year, furniture and equipment used in the extraction process, equipment used to store finished products, and items used in administration, general management, or marketing.
Qualifying purchases must be primarily used in manufacturing, processing, refining, fabricating or recycling as well as research and development activities. Property used to repair, maintain or test qualified tangible personal property also qualifies for the exemption.
California follows many other states that offer tax benefits to businesses engaged in manufacturing and research and development activities. The new California Law provides taxpayers with a very broad exemption that applies not only to equipment used directly in manufacturing and R&D but also property used to support the product. Please contact Chris Vignone, for further information.