California Enacts Manufacturing and R&D Equipment Exemption

California Gov. Jerry Brown has enacted a state sales and use tax exemption for purchases of manufacturing and research and development (R&D) equipment by biotechnology and manufacturing companies. Effective July 1, 2014 through July 1, 2022, the sale, storage, use, or other consumption in California of qualified tangible personal property (TPP) purchased for use by a qualified person to be used primarily (50% or more of the time) in any stage of the manufacturing, processing, refining, fabricating, or recycling of TPP is exempt from tax. The exemption applies for the purchase of machinery and equipment used throughout the manufacturing process beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered TPP to its completed form, including packaging, if required. Machinery and equipment used by a qualified person primarily in R&D as well as equipment used primarily to maintain, repair, measure, or test any qualified TPP described above is also exempt. Purchases by a contractor for use in the performance of a construction contract for the qualified person that will use the property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with those processes is also exempt. For the exemption to apply, the purchaser must provide the retailer with an exemption certificate. Retailers must retain the exemption certificate in their records and furnish it to the California State Board of Equalization upon request. Excluded from the exemption are consumable supplies and repair and replacement parts with a useful life of less than one year.

The exemption does not apply to any TPP purchased during any calendar year that exceeds $200 million of purchases of qualified TPP for which this exemption is claimed by a qualified person; or the sale or storage, use, or other consumption of property that, within one year from the date of purchase, is removed from California, converted from an exempt use, as provided, to some other use not qualifying for exemption, or used in a manner not qualifying for exemption. If a purchaser certifies in writing to the seller that the TPP purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and the purchase exceeds the $200 million limitation, or is removed from California within one year, converted for non-qualifying use or used in a non-qualifying manner as described above, the purchaser will be liable for payment of sales tax with applicable interest, as if the purchaser were a retailer making a retail sale of the property at the time the property is so purchased, removed, converted, or used, and the cost of the property to the purchaser will be deemed the gross receipts from that retail sale. The exemption does not apply to local sales and use taxes imposed under the Bradley-Burns Uniform Local Sales and Use Tax Law, transactions and use taxes imposed under the Transactions and Use Tax Law, and certain state taxes, as specified, from which revenues are deposited into certain funds including the Local Public Safety Fund, the Local Revenue Fund, and the Local Revenue Fund 2011. The exemption is repealed effective January 1, 2023. (S.B. 90 and A.B. 93, Laws 2013, both effective July 11, 2013)

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Posted on August 26, 2013