Equipment acquired for use in manufacturing or research and development could be partially exempt from California’s sales and use tax under a new exemption signed into law by Gov. Jerry Brown.
“This could be a huge tax savings if companies plan it correctly,” says Ken Huang, senior manager, state and local tax group at Moss Adams LLP. “We really haven’t had an exemption at the state level that is focused on manufacturing and R&D since the last one terminated Dec. 31, 2003.”
The exemption is part of Assembly Bill 93 and Senate Bill 90 and went into effect as of July 1.
California currently imposes a statewide sales and use tax rate of 7.5 percent on the sale and leasing of property. With the new exemption, businesses would only pay 3.3125 percent of the statewide sales and use tax, saving $41.88 for every $1,000 in purchases of qualifying property.
“This is the result of a coalition of industry efforts,” Huang says. “It has a lot of applications and is much broader than other previous exemptions.”
Smart Business spoke with Huang about who benefits from the exemption and how it could help spur the California economy.
How do you determine eligibility for the exemption?
A business has to be at least 50 percent manufacturing or R&D in order to be eligible. The current statute references certain codes that the business has to fit into, but it’s a lot broader than one would expect. If you don’t consider your business to be a manufacturer or an R&D company, it would still be worth exploring the opportunity.
Reach out to tax advisers and talk to them about whether a new product you’ve been working on or a business that you’ve been looking to acquire could affect your status. Look closely at activities that you have planned for the next year or two, as well as some of the historical purchases you may have made. Talk to your contractors or customers to get a clear idea as to whether you might qualify for this exemption.
How does the exemption work?
There are two components. It looks at actual manufacturing and activities involved with R&D. So if you’re a high-tech company that is a chip manufacturer, you could be looking at two business units. There is the actual manufacturing division and the other is research and development that occurs prior to the manufacturing of the product. Both of those activities would qualify.
The equipment that you buy and the software and technology used in the equipment are all eligible for the exemption.
If you were to build a clean room, a space that is commonly used in manufacturing and scientific research, the construction of that clean room would also qualify. So if a business is looking to expand in or relocate to California, that company can take full advantage of this exemption.
What kinds of items do not qualify?
Items that are not eligible include consumables with a useful life of less than one year; furniture and equipment used to store completed products once the manufacturing process is completed; and property used primarily in administration, general management or marketing.
What limits are written into the exemption?
There is a $200 million exemption limit per person on purchases of qualified property in any calendar year. It applies to both the sale and leasing of qualifying property and the exemption expires on July 1, 2022, unless otherwise extended.
While the law has been passed, the California State Board of Equalization, along with lobbying groups are working to issue a regulation that addresses all the different possibilities of how the law could be interpreted.
How could this exemption help in California?
Many surrounding states have exemptions and not just in manufacturing. They use the exemptions to lure business into their state. California hasn’t had one and the passage of this one is huge. While the economy has been strong of late, the hope would be that this will sustain the growth and keep more business in California.