CA Partial Sales and Use Tax Exemption

As a way to encourage economic growth in California, a new tax law recently went into effect that may offer significant savings for your business. The new California partial sales and use tax exemption allows certain businesses to purchase or lease manufacturing or research and development (R&D) equipment at a reduced sales and use tax rate for acquisitions on or after July 1, 2014.

Exemption Rate
If you are a business in manufacturing, biotechnology or the physical, engineering, and life sciences, you may qualify for this reduced rate. The partial exemption reduces the current tax rate of 7.5% to 3.3125%, plus applicable district taxes. This exemption applies to the state general fund portion of the sales and use tax rate, but does not apply to any local, city, county or district taxes. You must be a qualifying person who purchases or sells qualified property to be eligible for this exemption.

Eligibility
To be eligible for the partial exemption, you must meet all of the following conditions:

• Be primarily engaged in certain lines of business, also known as a “qualified person,” which includes:
  • Any form of manufacturing described in the North American Industry Classification System (NAICS) Codes 3111 to 3399.
  • Research and development in biotechnology or the physical, engineering, and life sciences described in the NAICS codes 541711 or 541712.
• Purchase “qualified tangible personal property.”
• Use that qualified tangible personal property in a manner qualifying for the exemption.

“Qualified tangible personal property” generally includes:

• Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts and operating structures.
• Equipment or devices used to operate, regulate or maintain the machinery, including but not limited to, computers, data processing equipment and computer software.
• Tangible personal property used in pollution control that meets standards established by California or any local or regional government agency within California.
• 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 after completion of the processes are not included.

Filing Requirements for Purchasers
There is no need to file with the State Board of Equalization. When you make a qualifying purchase or lease, you must provide the seller with a timely partial exemption certificate (BOE-230-M) to obtain the reduced tax rate. This form may be found on the State Board of Equalization website or by clicking here. You may also issue a blanket certificate.

Filing Requirements for Sellers
If you make qualifying sales or leases, you must obtain a timely exemption certificate from the purchaser. You will be able to claim the deduction for sales subject to the manufacturing exemption on your sales and use tax return.

Background
Sales tax exemptions are often used to encourage business and development. Although managing sales tax exemptions is a time consuming part of business, it is critical. Please note that existing sales and use tax laws impose taxes on retailers measured by the gross receipts from the sale or purchase of tangible personal property in California. With this partial exemption, there will be a significant benefit to taxpayers in California who primarily engage in manufacturing and R&D activities.

Conclusion
The Franchise Tax Board is also in the process of developing a regulation that will provide additional guidance to implement the partial sales and use tax exemption that became effective on July 1, 2014. To see if you fall within the business code descriptions above, please visit the North American Industry Classification System website at www.naicscode.com when considering your eligibility for the exemption.

Please contact your advisor if you have questions regarding your eligibility for the California partial sales and use tax exemption.