On July 1, 2014, a new sales tax exemption went into effect creating significant tax savings for many California businesses. Companies engaged in manufacturing activities and specific types of research and development may now qualify for a reduced sales and use tax rate on qualifying equipment purchases. The Manufacturing and Research & Development Equipment exemption offers a partial sales and use tax exemption reducing the state sales tax rate from 7.5% to 3.3125%. It’s important to note that the exemption only applies to state taxes and does not change local tax rates. To help clients, prospects and others understand the new exemption; JLK Rosenberger has provided a summary of key information below.
Review the qualification criteria below to determine if your company and expected purchases will qualify for the partial exemption.
- Qualifying Company – Refers to a company primarily engaged (50% or more of the time) in general manufacturing, research and development in biotechnology, or research and development in the physical engineering or life sciences. In addition, a company can also qualify if in the prior financial year they received 50% or more of gross revenue from, or expended 50% or more operating expenses in, a qualifying line of business. For example, revenues derived from selling research and development services or licensing intellectual property from these activities would qualify.
- Qualifying Property – This includes machinery and equipment (including moving parts and operating structures), equipment used to operate, control, regulate or maintain the machinery, property used to maintain pollution control and special purpose building and foundations used as an integral part of the manufacturing, processing, fabricating or recycling process. It is important to note that qualifying property does not include consumables with a useful life of less than one year, furniture, inventory and equipment used to store finished products and any property used primarily for administration, management or marketing.
- Qualifying Uses – Property must be used primarily (50% or more of the time) for manufacturing, processing, refining, fabricating or recycling. It may also be used for research and development, machinery to maintain, repair, measure or test and of the property involved in the process outlined above. Finally, any property used by contractors for the performance of a construction contract for a qualifying company to make integral improvements to property involved in the manufacturing processes will also qualify.
Claiming the Exemption
Unlike other incentives currently available through the state, there is no need to apply to the Board of Equalization (BOE) to realize the benefit. When a qualifying lease or purchase is made, the buyer must provide the seller a partial exemption certificate. The certificate should include purchaser contact information, signature, statement indicating the property is going to be used for a qualifying activity, statement indicating the purchaser is primarily involved in manufacturing or other qualified business activity, and description of the equipment and date of purchase. The BOE has provided a sample partial exemption certificate for review and use by qualifying companies.
It’s important to note that a taxpayer may not exceed $200M in purchases subject to the partial exemption in a calendar year. It is the responsibility of the taxpayer to track the amount of purchases made during the year. If the annual cap is exceeded, the taxpayer will be liable for the sales tax amount on purchases exceeding the limits.
There are significant tax savings to be realized for qualifying leases or purchases. To determine if your company qualifies to take advantage of the partial exemption, contact us today. For additional information on the California Manufacturing Partial Sales Tax Exemption program or to determine if your company qualifies, please contact JLK Rosenberger at 949-860-9902, or click here to contact us.