California Manufacturing and Research & Development Equipment Sales and use tax exemption

 

Effective July 1, 2014 through June 31, 2022 businesses at least 50% engaged in manufacturing or research and development (R&D) in biotechnology, physical, engineering and life sciences may claim an exemption from the California state sales tax at the current rate of 4.1875% (local/district taxes still must be paid).

Sales tax exempt qualified tangible personal property includes:

1. Any stage of the manufacturing, processing, refining, fabricating, or recycling process

2. Research and development

3. To maintain, repair, measure, or test any qualified tangible personal property described in (1) and (2); and

4. For use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person

BOE Amendment and Clarification

The BOE amended the definition of qualified tangible personal property, clarifying that the following types of tangible personal property are deemed to have a useful life of one or more years for state income or franchise tax purposes:

1. Property included under a warranty by the manufacturer to last one or more years shall be treated as having a useful life of one or more years;

2. Property that is included under a maintenance contract lasting one or more years shall be treated as having a useful life of one or more years; and

3. Property that is normally replaced at intervals of one or more years.

Further, the amendment provides that the above useful life provisions apply even if the taxpayer has expensed the purchase. The BOE intended to address potential ambiguity given that the original version of the exemption did not specify whether a qualified person who currently deducts the entire cost of otherwise qualified tangible personal property that actually has a useful life of one or more years is “treating” such property as having a useful life of less than one year or a useful life of one or more years for state franchise and income tax purposes. the result of this amendment could represent a benefit for certain business, particularly smaller ones, that may not capitalize all equipment.

In conclusion, taxpayers in the R&D and manufacturing spaces could potentially benefit from the exemption on certain equipment purchases, regardless of whether they expense or capitalize the equipment purchased.

Sellers must obtain a partial exemption certificate at the time of purchase which is available on the BOE’s website at the following link:

www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Sellers

For additional assistance to understand this new tax benefit, please visit the above BOE website, contact the BOE directly by email or phone, or contact Richard Huffman, CPA, MST tax partner at Wright Ford Young & Co. at rhuffman@cpa-wfy.com.

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