Effective September 25, 2014, the California State Board of Equalization (BOE) finalized a regulation on the partial sales and use tax exemption which allows businesses to qualify for this exemption even if manufacturing (or the other following qualified activities) is not its predominant activity. Under the regulation, a business predominantly operating in a non-qualifying activity could still claim the exemption if a portion of its business is engaged in a qualifying activity. This portion of the business can be a separate economic unit, a separate cost center, a division, or even be in a separate location. For example, a structural steel contractor that fabricates metal in its shop would qualify. Thus, purchases of metal fabrication equipment would be partially exempt from sales and use tax.
You may be aware that the California Enterprise Zone (“EZ”) sales and use tax credit ended on December 31, 2013. However, California has enacted a new incentive program that allows certain industries to claim an exemption (versus an income tax credit) for the state portion (but not the local portion) of the sales and use tax on certain new or used assets purchased on or after July 1, 2014. This exemption means that qualifying businesses will NOT have to pay the state portion of the sales tax when purchasing qualified equipment. Unlike the expired EZ sales tax credit, the new partial exemption will be available statewide, not limited to certain geographic locations, and will benefit businesses that are not in a taxpaying position.
Purchases or capital leases of tangible personal property may qualify if used primarily for any of the following activities:
- Manufacturing, processing, refining, fabricating, or recycling;
- Research and development;
- Maintaining, repairing, measuring, or testing any property being used for manufacturing; or
- Processing, refining, fabricating, or recycling.
What you need to know to take advantage of this benefit:
- The partial exemption applies to purchases of qualified tangible personal property made on or after July 1, 2014 through June 30, 2022.
- Businesses will receive a partial exemption (as opposed to an income tax credit) at the rate of 4.1875% of cost through Dec. 31, 2016 (3.9375% Jan. 1, 2017 – June 30, 2022) from certain types of asset purchases ifthey are primarily (more than 50%) engaged in the following industries:
– 3111 to 3399 of the NAICS (manufacturing processing, refining, fabricating, or recycling).
– 541711 and 541712 of the NAICS (biotechnology, or physical, engineering, and life sciences research and development).
- In order to receive the exemption, companies will need to provide an exemption certificate (Form BOE-230-M) to the seller at the time of purchase. A copy of the certificate is available at http://www.boe.ca.gov/pdF/boe230m.pdf.
- The program includes a cap of $200 million annually in aggregate qualified purchases per business each year.
- A claw back, equal to the value of the sales and use tax exemption, will apply if qualifying purchases are removed from the state, or used for non-qualified activities within one year of the purchase.
- The exemption is not available to certain financial institutions, extractive and agricultural taxpayers.
- Items used in both qualified and non-qualified activities would qualify for the partial exemption as long as the use of the item in a qualified activity is 50 percent or more of the use of the property.
For additional information regarding the California Sales and Use Tax Partial Exemption, the California Enterprise Zone Program, and any other incentives, please contact Nic Waldenmayer, CPA, MBA, MBT at (714) 667-2600 or firstname.lastname@example.org.