From the Desk of Michael Zaldivar, CPA, CMI ~
Due to recent legislation, the 42 California Enterprise Zones (Old or current EZ) will be repealed as of December 31, 2013. The replacement tax incentives known as the New Enterprise Zone (New EZ) will begin statewide on July 1, 2014. Companies within the current EZ should consider the loss of this 30 year incentive and determine whether any actions should be taken prior to December 31, 2013.
Important for Companies in the Current EZ
If your company is currently in one of the 42 Enterprise Zones (presently designated) it makes sense to consider the loss of this longstanding incentive and determine whether it is worthwhile to accelerate acquisitions prior to the December 31, 2013 termination date. Between the dates January 1, 2014 and June 30, 2014 there will be no EZ credits or partial exemptions available. Capital acquisitions made during this time will be fully taxable.
EZ Gap – Per the legislation, the current EZ benefits (tax paid at source and offsetting credit on income tax return) will not be available after December 31, 2013 and the New EZ benefits (prequalifying partial sales tax exemption, partial tax collected by retailer, certificates must be issued and retained to document reduced collections, rule making still in process) will not take effect until July 1, 2014. Therefore, this will create a six-month window where no EZ benefits will be available and all capital expenditures will be fully taxable.
This EZ Gap can be a point of consideration for organizations strategizing capital equipment acquisitions. Basically, if a company is in the current EZ then full sales tax credit can be taken on the income tax return ending 12/31/2013 for their taxable equipment purchases that are placed in service by this date. That same company purchasing the same equipment during the EZ Gap period (1/1/2014 to 6/30/2014) will pay full tax with no credit or partial exemption. After July 1, 2014, the New EZ benefits will be subject to prequalification and the same purchaser is going to need to apply for a certificate that they will issue to their vendor as support for the partial exemption (4.1875%) of the state portion (currently 7.5%) of the sales or use tax.
After July 1, 2014 – The New EZ benefit will be a reduced imposition of the state portion of the sales or use tax of 3.3125% (7.5% – 4.1875%). The 3.3125% state rate will be combined with applicable local and district impositions at the source of the sale or purchase. The New EZ partial imposition will be available to businesses that are primarily involved in manufacturing and biotechnology, or physical, engineering, and life science research and development. Additionally, these benefits will be available to businesses located throughout the State as opposed to designated areas. This is an important distinction as previously EZ benefits were limited to businesses that were located in specific geographic locations within California. To use the exemption, businesses will need to pre-qualify through a screening or application process with the Board of Equalization. Once qualified, it is presumed that the business will be issued a partial exemption certificate that must be used to document all partially exempt (and partially taxable) purchases. These purchases are limited to machinery and equipment with a useful life of one year or more, which are used primarily in manufacturing, processing, fabricating, refining or recycling of tangible personal property, or for research and development purposes. In some cases, the exemption may apply to purchases by construction contractors.
For businesses located outside of a current enterprise zone, the partial sales tax exemption will expire on January 1, 2019. For businesses that are located in a historical enterprise zone, the partial sales tax exemption will expire on January 1, 2021.
Partial Exemption Certificate – It should be noted that with the enactment of the New EZ partial exemption, there will be additional documentation retention standards that did not exist under the Old EZ program. Partial exemption certificates will need to be collected, validated and retained by all retailers selling to qualifying EZ purchasers. This certificate collection effort is likely to mimic the contemporaneous certificate standards in place for resales and other exemptions. As usual, in the area of sales and use tax, documentation will be key.
The California State Board of Equalization is currently in the process of writing regulations and developing the administrative procedures that will govern the EZ partial sales and use tax exemption. We will release additional information as it becomes available.
For Further Information