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Partial Exemptions for Manufacturers in CA (Do you Qualify?)

author photo of Monika Miles

In July 2014, California joined the ranks of most other states in granting a partial sales/use tax exemption on purchases of qualified manufacturing and research and development equipment. While it is only a partial exemption (see discussion below), we are happy to finally see a broader exemption than we’ve seen in the past. While California’s job market improved by 1.5% (or 220,000 jobs) in 2013, two industries specifically did not contribute to the overall improvement - the public sector and the manufacturing industry, which has been experiencing job loss for the past 10 years. In 2003 the manufacturing industry accounted for 10.5% (1.5 million) of the total state employment whereas in 2012 that number dropped to 8.5% (1.25 million). Note that California has tried incentivizing manufacturing in the state previously. Between 1994 and 2003, we had the Manufacturers’ Investment Credit (“MIC”) to stimulate business in the manufacturing sector. The MIC was a tax credit, equal to 6% of the qualified costs paid or incurred for the acquisition or construction of qualified property and was claimed against the franchise tax, rather than being claimed directly as an exemption from sales tax. The MIC sunset 12/31/03 and we have effectively had no relief in this area for over 10 years. Perhaps that is one of the many reasons that jobs in this sector have been dwindling.

Hoping to revive the state’s manufacturing sector, in 2013 Assembly Bill 93 and Senate Bill 90 were passed by the legislature and signed by Governor Jerry Brown. In simple terms, these laws call for a partial exemption from sales and use tax paid on qualified purchases of manufacturing and research and development equipment. Specifically, qualified companies are those engaged in “manufacturing, processing, refining, fabricating, or recycling” as described in the North American Industry Classification System (NAICS) codes 3111 to 3399 or for companies engaged in R&D for either biotechnology or physical, engineering, and life sciences under NAICS codes 541711 and 541712. The primary activities of the establishment must fall within these NAICS code in order to qualify for the exemption. The manufacturing equipment must be used at least 50% of the time for manufacturing purposes, must remain in California for at least a year, and should have a useful year greater than one year. And purchases in excess of $200 million in any one year do not qualify. From July 1, 2014 to December 31, 2016 the exemption is at a set rate of 4.1875%. From January 1, 2017 to June 30, 2022 the rate will be 3.9375%.

In order to claim the exemption, a qualified purchaser must either issue a specific exemption certificate to the seller, or claim the reduced amount of tax when filing its use tax returns (for items purchased out of state). The exemption seems fairly straightforward on its face, however, based upon our experience in helping clients maximize the MIC years ago, we are convinced that documentation will again be key with this similar exemption and that companies should not underestimate the importance of obtaining the documentation up front and maintaining it in case of future audit. Some things that we are assisting our clients with include documentation of qualifying industry (NAICS code) – either as primary industry or qualified “establishment”, qualified use of the property itself, and maintaining proper supporting documents, such as invoices, etc. Because the exemption is new, and audits have likely not yet started, it will be important to be able to predict what will be expected in order to sustain an audit. Stay tuned to this blog for updates. For additional information, please also take a look at the Miles Consulting Group blog articles:

CA Manufacturing Exemption – Regs Final” from July 2014 and “Coming Soon – CA Manufacturing Exemption” from May 2014.

If you have further questions about this new exemption, please don’t hesitate to contact me at 408-266-2259 or Monika Miles.

Do you have questions about California (and/or multi-state) sales tax - or does your business need assistance with other tax issues?

Monika welcomes inquiries from SalesTaxSupport.com users and offers a complimentary 30 minute consultation to companies with multi-state activities. Please use the "Request a Consultation" link on FIRM PROFILE page to submit your question or consultation request.

Other recent “California (CA)” posts by Monika Miles, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

8 Responses to Partial Exemptions for Manufacturers in CA (Do you Qualify?)

  • Posted by PATTI on January 4, 2017 8:36am:

    2017 sales tax exemption rate
    For Orange County has the exemption rate changed from 4.1875 to 3.9375? I have conflicting numbers on the BOE site in their "Manufacturing & Research Tax Guide" states "Qualified persons will pay only 3.3125%"

    • Posted by Author photo of Monika Milesmonikamiles on January 19, 2017 5:41pm:

      Patti,
      Yes, the rate has changed as you indicated above. Remember that this is a only a partial exemption against the state tax rate. So, district and local taxes get added back in. (Or, take your total Orange County rate and subtract 3.9375%.) Hope that helps!

  • Posted by Jon on August 30, 2016 11:26am:

    When calculating taxes for a customer with a tax exemption certificate is the tax rate 4.1875% flat, or the current tax rate minus 4.1875%?

    • Posted by Author photo of Monika Milesmonikamiles on September 16, 2016 11:26am:

      Start with the total amount of sales tax you'd ordinarily charge (all in - state, county, etc.), then subtract the 4.1875% to get the net amount of sales tax to be charged. (The 4.1875% is the exemption amount.) Hope that helps!

  • Posted by Tim on August 11, 2016 6:13pm:

    Do Bio/Pharma companies in CA get an exemption from sales/use tax for medicines that are manufactured for clinical trials?

    • Posted by Author photo of Monika Milesmonikamiles on September 16, 2016 11:29am:

      Tim,
      The Partial Manufacturer's Exemption is for an exemption on the purchase of machinery and equipment used by qualified manufacturers in qualified NAICS codes. The medicines may qualify under a different exemption, but not this one. I'd need a little more information to give you a more complete answer.

  • Posted by Steve on December 8, 2014 2:24pm:

    Thank you. Great post.

    • Posted by Author photo of Monika MilesMonika Miles, CPA on January 12, 2015 4:56pm:

      Thank you! I appreciate your comments. Hopefully you'll enjoy my upcoming post on resale certificates!

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