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California's new partial sales and use tax exemption
Tax exemptions for manufacturing and research & development activities
Starting July 1, 2014, a significant new partial sales and use tax exemption for certain manufacturing or research and development equipment purchases became available in California. This article gives an overview of AB 93 and SB 90, addresses each of the several key definitions in the new statute and final regulation, and provide observations regarding application of the exemption.
AB 93 and SB 90
AB 93 and SB 90 mark the California legislature’s first effort to grant an exemption to a taxpayer who only performs research and development in the state. Previous exemptions required that the taxpayer be a manufacturer to make qualifying exempt purchases.2 Taxpayers involved in manufacturing or research and development activities in California can now potentially reduce their California sales and use tax liability by more than $8 million annually.
Currently, the California state sales and use tax rate is 7.5 percent.3 District taxes may be added to the state sales and use tax rate. Beginning July 1, 2014, the new partial exemption lowered the levied statewide sales and use tax rate on eligible purchases or leases by 4.1875 percentage points.4
On July 17, 2014, the State Board of Equalization (BOE) approved California Code of Regulations (CCR) §1525.4,5 which was approved by the Office of Administrative Law (‘‘OAL’’) on September 25, 2014.6 The new statute and final regulation contain several key definitions, specifically: ‘‘qualified person,’’ ‘‘establishment,’’ ‘‘primarily engaged,’’ and ‘‘qualified tangible personal property.’’ In addition to considering each of these definitions, this article will address the new partial exemption and final regulation,7 and provide observations regarding application of the exemption.
1 California Revenue & Taxation Code (‘‘CRTC’’) §6377.1 (amended by 2013 CA S.B. 90 and 2013 CA A.B. 93).
2 CAL. STATE BD. OF EQUALIZATION, Operations Memo No: 1190 (Revised July 30, 2014), http://www.boe.ca.gov/transparency/opsmemos/OM-1190.pdf.
3 CAL. STATE BD. OF EQUALIZATION, California City & County Sales & Use Tax Rates, http://www.boe.ca.gov/sutax/pam71.htm.
4 The partial exemption will decrease by 0.25 percent to from 4.1875 percent to 3.9375 percent when the State’s Fiscal Recovery Fund pays off certain Economic Recovery Bonds authorized in 2004.
5 Manufacturing and Research & Development Equipment: Hearing on Regulation 1525.4 before the Cal. Bd. of Equalization (July 17, 2014), http://www.boe.ca.gov/meetings/transcripts/2014_07_17F1.txt
6 CAL. STATE BD. OF EQUALIZATION, Regulation 1525.4 OAL approval, http://www.boe.ca.gov/serp.htmlq=regulation+1525.4&cx=001779225245372747843%3A3ekb7ulvxre&cof=FORID%3A10&ie=UTF-8.
7 CAL. STATE BD. OF EQUALIZATION, MANUFACTURING AND RESEARCH & DEVELOPMENT EXEMPTION, http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm (last visited Aug. 20, 2014).