By Daniel Vukosa
While the Republican tax bill has dominated headlines since it passed last December, tax regulations at the state level have often gone unnoticed, particularly in California, and many companies are not aware of certain exemptions and advantages that they may be allotted. In an effort to revive the manufacturing industry in the state, regulators have begun offering eligible manufacturers and research and development companies a partial exemption of the sales and use tax on certain manufacturing and equipment purchases and leases between July 1, 2014 and July 1, 2030. Additionally, Assembly Bill 398, which was signed into law on July 25, 2017, amended the partial exception to broaden its reach.
The exemption eliminates the state portion of sales tax (3.9375%) on any qualified purchases of up to $200 million by a qualified company. While most companies count on a seller to assess the correct amount of sales tax, a purchaser should take advantage of the exemption and provide sellers with the correct information and documentation to get the exemption.
Who and What Qualifies?
A “qualified person” is someone who is primarily engaged (50 percent or more of the time) in manufacturing, research and development in biotechnology, and research and development in the physical, engineering and life sciences sectors. Beginning January 1, 2018, the definition was expanded to include businesses primarily engaged in operating electric power generation and removed the exclusion of those engaged in agricultural business activities.
“Qualified tangible personal property,” or “qualified property for short, includes, but is not limited to, the following:
- Machinery and equipment, including component parts and tooling.
- Equipment or devices used or required to operate, control, regulate or maintain the machinery.
- Tangible personal property used in pollution control that meets standards established by the state or any local or regional governmental agency within the 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.
Generally, for purposes of the partial exemption, property must be treated as having a useful life of one or more years and is capitalized on your state income or franchise tax returns. Otherwise the partial exemption is inapplicable. The qualified property must also have a qualified use. The tangible personal property must be used more than 50% of the time in a qualified business, must remain in California for at least a year and be used 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.
- For use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person.
Examples of property that does not qualify, includes:
- Property placed in service and sold or otherwise disposed of in the same year.
- Supply items.
- Items that are not expected to have a useful life of one year, even if those items last beyond one year.
- Items that are replaced on a regular basis of less than one year.
What is the process to claim the exemption?
There is no need to apply with the state for the partial sales tax exemption. Similar to a resale certificate, in order to take advantage, a company must provide the supplier a timely completed manufacturing exemption certificate – whether they provide one for each purchase of issue a blanket one to a seller is up to them. The certificate is fairly simple and will include information regarding the company and the purchase. The certificate can be found at: http://www.cdtfa.ca.gov/formspubs/cdtfa230m.pdf
If you purchased qualifying property in the past at the full tax rate you may be entitled to a refund of any overpaid tax. A refund may generally be claimed at any time within the statute of limitations (three years). If the tax you paid was sales tax, you must request a refund from the retailer.If the tax you paid was sales tax, you must request a refund from the retailer.If you paid “sales” tax, this refund must be made through the retailer and the retailer would then file a claim with the state. If the tax you paid is use taxIf you paid “use” tax, you may file a claim directly with the state.
As companies look to grow and purchase assets, they should be aware of the exemption as it is generally not a benefit that a seller will bring to their attention. With any purchase, large or small, the exemption is a fairly easy way for companies to save cash.
Daniel Vukosa is a Tax Senior Manager in the San Francisco office of OUM & Co. LLP. He can be reached at firstname.lastname@example.org or (415) 434-3744.