New Sales & Use Tax exemption for Manufacturing Equipment

10 Sep

Effective July 1, 2014, through June 31, 2022, qualified taxpayers who make qualified purchases may claim an exemption from the state portion of California’s sales tax.1

The state tax rate is currently 4.1875%. The purchaser must still pay the local/district tax.

Qualified taxpayer

A “qualified taxpayer” is a business primarily engaged (more than 50%) in:

  • Any stage of manufacturing, processing, refining, fabricating, or recycling tangible personal property; and/or
  • Research and development in biotechnology and/or physical, engineering, and life sciences.

A business that derives more than 50% of its gross business receipts from the following activities is ineligible:

  • Agriculture;
  • Extractive;
  • Banking or financial; or
  • Savings and loans.

The 50% test is determined at either the legal entity level or at the establishment level within a legal entity.

A qualified taxpayer with multiple or single physical locations (or portions thereof), designated as “cost centers” or “economic units,” is eligible for a credit where a qualified activity is performed, as long as the taxpayer maintains separate books and records for the establishment.

Example: ABC Winery, LLC is comprised of three different operations: the vineyards, the winery, and a tasting room. The LLC does not qualify at the entity level because more than 50% of the gross receipts come from grape (agriculture) and wine (retail) sales. However, as long as the LLC keeps separate books and records, the winery establishment would qualify as a manufacturer eligible to claim the exemption for qualified purchases.

The 50% test is measured by gross revenue (including intercompany charges) from, or operating expenditures in, a qualifying line of business in the prior financial year.

Alternative ways to qualify

A taxpayer who does not qualify using the standard 50% test may still qualify if:

  • At least half of its employee salaries and wages, value of production, or full-time equivalent employees are in a qualifying line of business;
  • A combination of its qualifying lines of business exceeds 50% (e.g., its manufacturing activities combined with its R&D activities); or
  • It qualifies using any of the standard or alternative tests for the one-year period following the property’s purchase date rather than for the preceding financial year.

Qualified property

Qualified tangible personal property (TPP) includes, but is not limited to:

  • Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures;
  • Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including computers, data-processing equipment, and computer software, and any repair and replacement parts;
  • Pollution control equipment that meets state, local, or regional standards at the time of purchase; or
  • Special purposes buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process.

Note: A manufacturer may claim the exemption for property purchased for use in its R&D activity and vice versa.

Not qualified TPP

Qualified TPP does not include:

  • Consumables with a useful life of less than one year;
  • Furniture, inventory, and equipment used in the extraction process or used to store finished products;
  • TPP used primarily in administration, management, or marketing; or
  • Property that, within one year from the purchase date, is removed from California or converted to a nonqualifying use.

A single taxpayer or combined reporting unit cannot claim the exemption for purchases in excess of $200 million in a calendar year.

Qualified use

The property must be used:

  1. During any stage of the manufacturing, processing, refining, fabrication, or recycling process;
  2. For qualified research and development;
  3. To maintain, repair, measure, or test any qualified tangible personal property used in (1) or (2); or
  4. By a contractor purchasing the property for use in the performance of a construction property for a qualified person that will use the real property improvement as an integral part of (1) or (2).

Leases

Leases of qualified TPP that are classified as “continuing sales” and “continuing purchases” under 18 Cal. Code Regs. §1660 may qualify for the partial exemption as long as all other conditions are met. Rental payments made after June 30, 2014, qualify for the exemption even if the lease was entered into prior to July 1, 2014.

Exemption certificates

Sellers must obtain a partial exemption certificate at the time of purchase or lease (or lease period beginning after June 30, 2014, for leases entered prior to July 1, 2014).

A special exemption certificate is available for construction contractors. The exemption certificates, including a blanket exemption certificate, are available on the BOE’s website ([www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers]www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers), but sellers may accept any document as long as the document contains specified information.

Refunds

Taxpayers who realize they have qualified for the exemption after the purchase may provide the seller with an exemption certificate, and the seller must apply for a refund by filing a refund claim (using Form BOE-101, Claim for Refund or Credit) with the BOE within the limitations period established by RT&C §6902. However, if the purchaser paid use tax on the transaction, the purchaser may apply to the BOE for a refund.​