The Sales Tax Exemption provides a partial exemption3 from sales and use tax for manufacturers, and certain research and developers that purchase or lease tangible personal property for use in their business. In order to qualify for such an exemption, three conditions must be met: (1) the taxpayer must be a “qualified person”; (2) the taxpayer must purchase “qualified property”; and (3) the taxpayer must use the qualified property in a way allowed by this law.
First, in order to be considered a “qualified person” who is eligible for the Sales Tax Exemption, the entity applying for the exemption must be primarily engaged (50% or more of the time) in one of the activities enumerated in codes 3111-3399, 541711, or 541712 of the North American Industry Classification System. These code sections include a large portion of the manufacturing sector, such as manufacturers of: food, clothing, general supplies, biotechnology, pharmaceuticals, wood, chemicals, and machinery.
Secondly, the entity must be purchasing “qualified tangible personal property.” Generally, such qualified tangible personal property purchases must be for either: (1) machinery and equipment; or (2) special purpose buildings or foundations that are integral to the entities' activities (manufacturing or research and development). A taxpayer does not necessarily, however, have to purchase this qualified property. In many instances, qualified person will be entitled to the Sales Tax Exemption with a leased qualified property.
Lastly, the Sales Tax Exemption requires that the tangible personal property purchased or leased by the qualified person be used in a qualified way. In order to meet this “qualified use” requirement, the tangible personal property must be used primarily (more than 50% of the time): in any stage of manufacturing; in research of development; to maintain, repair, measure, or test any other qualified personal property; or by a contractor who is purchasing the property to perform a construction contract for a qualified person.
The tax-saving benefits of meeting the Sales Tax Exemption can be quite significant. The Sales Tax Exemption is applicable to the first $200 million in qualified purchases for each taxpayer annually. A qualifying taxpayer, consequently, who purchases $200 million in qualified property will realize more than $8,000,000 in annual savings. Will this Sales Tax Exemption be enough to actually lure out-of-state entities to California? Only time, quantitative data, and feedback from companies utilizing the exemption will tell. But when used in conjunction with other exemptions and credits recently enacted in California, the anti-business atmosphere that California has been long-criticized for appears to be slowly dissipating.
1 California, unlike any other state in the U.S., has three separate departments in charge of imposing tax on individuals and corporations: California Board of Equalization, California Employment Development Department, and California Franchise Tax Board.
2 Such anti-business elements include, among other things, outdated regulatory provisions and budget processes, stiff regulations and overly aggressive enforcement of such regulations, and high tax rates.
3Companies are exempted from the State of California's sales tax (4.19%) but not additional county tax.