California Manufacturing And Research & Development Partial Sales & Use Tax Exemption

Since 2014, California Taxpayers involved in manufacturing and/or research and development activities in California can potentially reduce their California sales and use tax liability.  Currently, the California state sales and use tax rate is 7.25 percent (not including district and other taxes).

The partial exemption from sales and use taxes is a rate of 4.1875% from July 1, 2014 to December 31, 2016, and at the rate of 3.9375% from January 1, 2017 to June 30, 2022. You are not relieved from your obligations for the remaining state tax and local and

district taxes on this transaction. This partial exemption also applies to lease periods occurring on or after July 1, 2014 and before July 1, 2022, for leases of qualified tangible personal property even if the lease agreement was entered into prior to July 1, 2014.

To be an eligible purchase you need to determine if the qualified tangible personal property will be used by the taxpayer primarily for:

  1. for manufacturing, processing, refining, fabricating, or recycling;
  2. for research and development;
  3. to maintain, repair, measure, or test any property being used for (1) or (2) above; or
  4. as a special purpose building and/or foundation.

Qualified tangible personal property does not include the following: consumable supplies with a useful life of less than one year, furniture, inventory, equipment used in the extraction process, equipment used to store finished goods until the manufacturing process completes, and property used primarily in administration, general management or marketing.

Taxpayers previously excluded from prior tax exemptions should check if they are now eligible to receive benefits under the new law. Although many states have sales and use tax exemptions for manufacturing and/or research and development, California has enacted a unique scheme that is more complex than nearly any other state. Generally, a taxpayer should check if they qualify as a ‘‘qualified person’’ that may be purchasing or leasing ‘‘qualified tangible personal property’’ used within a ‘‘qualifying activity.’’ While the BOE has stated that it will answer specific questions regarding the exemption, taxpayers are advised to consult with their tax professionals to explore and navigate this new and beneficial exemption.