It seems like only yesterday that the California Partial Manufacturing Sales Tax Exemption was first enacted in July 2014. It’s been alive and well for over 3 years and with some recent legislation, the exemption has been extended and expanded to additional qualified companies.
What is the exemption?
It allows certain manufacturers and biotech companies to exempt a portion of California sales and use tax on their purchases of qualified equipment used in manufacturing and research and development (R&D).
This exemption originally went into effect July 1, 2014 and applies to any sale, purchase, and lease of qualified tangible personal property on or after this date. As originally drafted, the exemption was set to sunset on July 1, 2022. However, the Governor recently signed Assembly Bill (A.B.) 398 (https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180AB398), which extends the partial exemption for manufacturing and research and development equipment to July 1, 2030. The bill has also expanded the exemption to include additional qualifying companies (see below).
The partial exemption rate is currently 3.9375% and applies to sales of qualifying property sold to a qualified person. As CA can’t seem to do anything the easy way, that means that the purchaser still pays a portion of the state sales tax rate, plus applicable district taxes. For example, if the total tax rate would have been 9.5%, a qualified taxpayer would pay a net sales tax rate of 5.5625% on the purchase.
Who qualifies for this exemption?
Purchasers are eligible for the partial exemption if:
- The company engages in certain types of businesses (is a “qualified person.”) To qualify, the company must operate in a particular NAICS code range: 311100 to 339999 (manufacturing), 541711 (R&D in biotech), or 541712 (R&D, other), or (as added by A.B. 398, 22111 to 221118, inclusive and 221122);
- the equipment purchased needs to be “qualified property” (i.e; furniture and office supplies do not qualify);
- the purchased equipment needs to be used at least 50% in the process of manufacturing or R&D;
- A.B. 398 expanded the exemption to include a contractor (and a qualified person) purchasing qualified equipment used as an integrated part of generation/production or storage/distribution of electric power.
For this exemption to apply, once the purchaser meets all of the qualifications, the seller accepts a completed exemption certificate from the purchaser.
Write it down!
On the surface, this exemption seems straightforward. But as always related to exemptions, it is important to document all pertinent information so that proper support is readily available in case of a future audit.
The Company may be audited several years from now. If proper documentation is not available to show the proper qualifications of the equipment at the time of purchase, the company may lose the benefit.
We recommend to our clients to make sure that they document when the piece of equipment was placed into service and its qualified use. Keep in mind that the piece of equipment may have been moved or taken out of service several years later once an audit finally occurs. In some cases, we even recommend keeping photographs of larger machinery if the company expects to move it in the future.
Can we go back and claim a refund?
If a company purchased qualifying property at the full tax rate, but later realizes that they might have qualified for the exemption, they may be able to go back and claim a refund. But again, it’s not necessarily straightforward.
For example, if the company purchased qualified machinery and paid tax at the rate of 8.50% and the purchase qualifies for the partial exemption, then the applicable tax rate for the transaction should have been a net rate of 4.5625% (8.5% minus the exemption amount of 3.9375%). A refund may generally be claimed at any time within the statute of limitations (generally, within three years). If the company is seeking a refund for overpaid taxes on qualifying purchases of manufacturing or R&D equipment, the procedures vary depending on whether the original purchase was subject to sales tax versus use tax.
- If the tax paid was use tax (typically use tax applies when a company makes a purchase from an out-of-state vendor), the company would file a claim for refund directly with the California Department of Tax and Fee Administration (“CDTFA”, formerly Board of Equalization) by completing form BOE-101, Claim for Refund and Credit and submitting to the CDTFA.
- If the tax paid was sales tax, a company must request a refund from the retailer/seller. The retailer would then file a claim for refund with the CDTFA. The purchaser will need to provide the retailer with a completed partial exemption certificate (BOE-230-M) and documentary evidence that the original purchase should have qualified for the partial exemption. Note that the retailer is not obligated to request the refund on the purchaser’s behalf. So, depending upon the materiality of the potential refund, purchasers will likely want to be judicious in asking their vendors to go through the refund exercise.
If you think your company may qualify for this exemption (either currently or retroactively), and you have questions as you are navigating the nuances of this exemption, please contact us. Many of our clients are technology companies and there are some “tricks of the trade” that will allow a company to claim the partial exemption even if, at first glance, they may not appear to, based on their NAICS code. Click to learn more about the California Partial Sales Tax Exemption for Technology Companies.
Other recent “California (CA)” posts by Monika Miles, CPA:
- Reminder: California Manufacturers' Sales Tax Exemption
- Technology Companies and the California Partial Sales Tax Exemption
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview
- CA District Taxes – Are You Calculating the Full Rate?