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California Sales Tax Exemption for Manufacturing and R&D Machinery and Equipment

Beginning July 1, 2014 manufacturers in California are eligible for a partial exemption from state sales and use tax. This California sales tax exemption for manufacturing and research and development machinery and equipment reduces the state sales tax by 4.1875% from July 1, 2014 through December 31, 2016. From January 1, 2017 through June 30, 2022 the state sales tax rate is reduced by 3.9375%. In order to qualify for this exemption the “qualified tangible personal property” must be purchased or leased by a “qualified person” and used in one of four ways:

1. for manufacturing, processing, refining, fabricating, or recycling;

2. for research and development;

3. for maintaining, repairing, or measuring said property; or

4. as a special purpose building.

This California sales tax exemption for manufacturing provided in CA Rev. & Tax. Code 6377.1 includes “qualified tangible personal property” such as machinery and equipment, devices or software that help to run the equipment, pollution control devices, and special purpose buildings that are integral to the manufacturing process or are used for research. It does not include consumables with a useful life of less than one year, equipment used to store finished products that have completed the manufacturing process, or property used over 50% of the time in administration, general management, or marketing.

In addition to the California sales tax exemption for manufacturing, this exemption also extends to purchases of machinery and equipment used in research and development (“R&D”).

“Qualified person” means a company that is primarily engaged in those lines of business described in Codes 3111 to 3399, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition.

This California sales tax exemption for manufacturing does not apply to any tangible personal property purchased within a single calendar year that surpasses $200M. It also does not include property that within one year from the date of purchase is removed from California or becomes used in a manner that is not exempt from sales and use tax.

In order to claim this exemption, California manufacturers must supply their vendors with a valid exemption certificate. This is the partial California sales tax exemption certificate for manufacturing and research and development equipment (CDTFA-230-M). This certificate can be found at the California Department of Tax and Fee Administration (CDTFA) website. The California Department of Tax and Fee Administration was born out of the July 1, 2017 restructuring of the State Board of Equalization. This restructuring split the State Board of Equalization into three separate entities to guarantee impartiality, equity, and efficiency in tax appeals, protect civil service employees, ensure fair tax collection statewide, and uphold the California Taxpayers’ Bill of Rights.

Once the vendor has the exemption certificate they can file a claim for refund for the overpaid portion of sales and use tax on your behalf up to the statute of limitations of 36 months. The California Department of Tax and Fee Administration prefers that vendors receiving customers’ partial exemption certificates claim the refund in the form of a deduction on their sales and use tax return under Section D. The vendor should issue the purchaser a credit for the sales tax paid in error and amend their California sales and use tax returns as instructed.  For more detailed information about how to complete the return, please see the BOE-401-INST pages 10 & 14.

If the transaction was subject to use tax, the purchaser may file a claim directly with the BOE.

Have a question? Contact Aaron Giles 

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Aaron C. Giles is the Founder and President of Agile Consulting Group. Aaron spent five years working within the specialty niche of Sales & Use Tax at Brown & Associates before forming his own firm in 2005. He has worked hundreds of audits in states all across the U.S. during that time and has delivered savings of over $75M in the form of refunds and credits to his clients. Today, he leads a group of talented, detail-oriented colleagues who focus exclusively on Sales & Use Tax.

Some of our firms’ greatest achievements have come in successfully arguing new and unique perspectives to existing tax law in various states enabling our clients to claim exemptions on categories of purchases previously held to be taxable. Included in these victories are: communication services taxes for religious nonprofit hospitals in FL, bulk purchases of drugs in VA, specific surgical tools and instruments for healthcare providers in TX, printing plates in GA, railroad utilities in KY, and most recently software in AL.