California – Exemption for Manufacturing and R&D Equipment

SALT Report 2712 – On July 11, 2013 California Governor Jerry Brown signed legislation that creates a sales and use tax exemption for purchases of manufacturing and research and development (R&D) equipment by biotechnology and manufacturing companies.

The legislation, AB 93 and SB 90, received broad, bipartisan support in the Legislature and establishes the Governor’s Economic Development Initiative. The Initiative will help strengthen California’s business climate by establishing the following exemption:

Manufacturing and R&D Equipment

Effective July 1, 2014 a sales and use tax exemption is available for the sale, storage, use, or consumption of any of the following tangible personal property purchased for use in California by a qualified person:

  • Who will use the items primarily in the manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point when the raw materials are received and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered the tangible personal property into its completed form, including packaging, or
  • Who will use the items primarily in R&D, or
  • Who will use the items to maintain, repair, measure, or test any qualified tangible personal property described above, or
  • Who is a contractor purchasing the property pursuant to a construction contract with the qualified person and 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

Qualified Person

For purposes of the exemption, a qualified person is defined as one that is a business identified in Codes 3111 through 3399, 541711, or 541712 of the North American Industry Classification System (NAICS).

Qualified Tangible Personal Property

The exemption applies to purchases and sales of:

  • Machinery and equipment, including component parts such as belts, shafts, moving parts, and operating structures,
  • Equipment or devices used or required to operate, control, regulate, or maintain the machinery, such as computers, data-processing equipment, and computer software, and all repair and replacement parts with a useful life of one or more years.  The exemption applies to items that are purchased separately or in conjunction with a complete machine and regardless of who assembles the machine or component parts,
  • Tangible personal property used in pollution control that meets certain standards established by the state or any other local or regional governmental agency within the state, and
  • Special purpose buildings and foundations that are an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes

Exemption Certificates

To qualify for the exemption, the purchaser must provide the retailer with an exemption certificate and the retailer must keep the exemption certificate in its records to verify the exempt nature of the sale.

Claw-Back Provision

If a purchaser certifies in writing that the exempt tangible personal property will be used in a manner that allows the seller to regard the sale as exempt from sales tax, and the purchase exceeds the $200 million limitation, or the purchaser removes the property from California within one year of purchase, or converts the property for use in a manner that does not qualify for the exemption, or uses the property in a manner that does not qualify for the exemption, the purchaser will be liable for the sales tax along with any applicable interest.

The legislation also creates hiring credits and investment incentives based on the amount of jobs created and retained and wages paid.  This exemption will expire on January 1, 2023.

For Further Information

California State Legislature – Senate Bill 90, Laws 2013

California State Legislature – Assembly Bill 93, Laws 2013

Governor Brown’s Press Release

SALT Report 2670 – Economic Development Bill Sent to Governor