On July 1, 2014, a powerful tax incentive capable of saving businesses over $8 million per year took effect in California. (Note: The exact maximum savings is $8,375,000. I got this amount by calculating $200 million x 7.5% = $15 million, then calculating $200 million at the reduced rate of 3.3125% = $6,625,000. The difference between the two, or savings to the taxpayer, is $8,375,000). Designed to attract industry and create high-paying jobs within the state, particularly in areas where poverty and unemployment have been prevalent, the partial sales and use tax exemption allows “qualified persons” to be taxed at a rate of 3.3125 percent, as opposed to the statewide tax of 7.5 percent, for certain sales, purchases, or leases of equipment up to $200 million annually. (Source: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB93&search_keywords). Although transactions are still subject to any applicable local taxes, the exemption may represent vast savings for qualifying businesses. (Source: http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers).
To reap the benefits of the sales and use tax exemption, a claimant must satisfy three basic requirements:
- Be a qualified person: qualified persons generally include those engaged at least 50 percent of the time in the business of manufacturing, research and development in biotechnology, and research and development in the physical, engineering, and life sciences.
- Purchase qualified tangible personal property: this includes machinery and equipment, devices necessary to operate or maintain the equipment, such as computer software or replacement parts, property used in pollution control, or buildings used as integral to the manufacturing and refining processes or as research or storage facilities related to such processes. Qualified property does not include consumables with a useful life of less than one year, inventory used in the extraction process, equipment used to store products that have already completed the manufacturing process, and property used primarily in administration, management, or marketing. Leases of qualified personal property may also qualify.
- Use the qualified property for certain qualified uses enumerated by the law: the property must be used more than 50 percent of the time for purposes such as R&D, any stage of the manufacturing process, or maintaining, repairing, or testing any qualified property. In certain cases, a contractor who purchases the property to use in a contract for a qualified person may satisfy this requirement.
For more information about the qualification requirements for the partial exemption, visit the California Board of Equalization website (http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm).
Claiming this incentive requires a seller to obtain a partial exemption certificate from the buyer. Any document may qualify as long as it contains certain information, such as the signature and contact information of the buyer, the seller’s permit number, a statement describing the qualifying property and affirming that it is to be used primarily for a qualifying purpose, and the date the document was executed. The certificate must be taken before the seller bills the buyer, at any time during the seller’s normal billing cycle, or at or prior to the time of delivery. (Source: http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers).
By determining whether their transactions meet these requirements, California businesses will benefit by paying state sales taxes at less than half the regular rate. Given the $200 million annual limit, this will translate to dramatic savings for some taxpayers. For more information about how to harness the maximum financial benefit under this exemption, contact Capital Review Group.