A 2013 law created by Governor Brown’s 2013 Economic Development Initiative allows certain businesses in manufacturing or in the fields of biotechnology or physical, engineering, and life sciences to purchase or lease manufacturing or research and development equipment at a reduced sales and use tax rate for purchases occurring on or after July 1, 2014. (See Assembly Bill 93 (Stats. 2013, Ch. 69) and Senate Bill 90 (Stats. 2013, Ch. 70); and Revenue & Taxation Code section 6377.1.) The California State Board of Equalization (BOE) will be the agency overseeing and implementing this manufacturing exemption.
According to the BOE, to be eligible under this law, a business must meet all three of the following conditions:
- Be engaged in certain types of business, also known as a “qualified person.”
o A “qualified person” means a person who is primarily engaged (50 percent or more of the time) in those lines of business described in the North American Industry Classification System published by the United States Office of Management and Budget.
§ These industries generally include those primarily engaged in the business of all forms of manufacturing, research and development in biotechnology, and research and development in the physical, engineering, and life sciences.
o “Primarily engaged” means 50 percent or more of gross revenues, including inter-company and intra-company charges, are derived from the qualifying manufacturing activity for the preceding financial year.
o For purposes of research and development, “primarily engaged” means 50 percent or more of the expenses are for such qualifying research and development activities for the preceding financial year.
o In cases where the purchaser was not primarily engaged in qualifying manufacturing or research and development activities for the preceding financial year, the one year period following the date of purchase of the property will be used.
o “Qualified person” does not include:
§ An apportioning trade or business that is required to apportion its business income pursuant to Revenue & Taxation Code section 25128.
§ A trade or business conducted wholly within this state that would be required to apportion its business income pursuant to Revenue & Taxation Code section 25128 if it were subject to apportionment pursuant to Revenue & Taxation Code section 25101.
- Purchase “qualified property.”
o “Qualified tangible personal property” 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, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
§ Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
§ 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 during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included.
- “Qualified tangible personal property” does not include:
o Consumables with a useful life of less than one year.
o 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.
o Tangible personal property used primarily in administration, general management, or marketing.
o Leases of qualified personal property may also qualify for the partial exemption.
- Use that qualified property for the uses allowed by this law.
o The tangible personal property must be used primarily (more than 50% of the time) in one of the following manners:
§ Any stage of the manufacturing, processing, refining, fabricating, or recycling process
§ Research and development
§ To maintain, repair, measure, or test any qualified tangible personal property described by the above, or
§ For use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person, provided that the qualified person will use the resulting improvement to real property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process or as a research or storage facility for use in connection with those processes.
For purposes of this exemption, the manufacturing process begins from the point a qualified business receives raw materials and introduce them into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the activity has altered the product to its completed form, including packaging, if required.
The BOE is scheduled to meet on April 22, 2014 to consider rules to help businesses understand whether their purchases of manufacturing and research and development equipment qualify for the manufacturing exemption.
If you have any questions regarding your business’s eligibility for this partial exemption, please contact Williams and Associates at (916) 488-8501.