The California Manufacturing Exemption allows certain manufacturing and biotech companies to exempt manufacturing and research and development (R&D) equipment purchases from sales and use tax.

• Purchased equipment or machinery must be used 50 percent or more during the manufacturing process.
• Equipment and machinery purchased and used for R&D qualifies.
• In any given calendar year, the combined amount of purchase must not exceed $200 million dollars.
  Any purchases beyond the $200 million threshold will not qualify.
• Only part of the state tax portion of the sales tax is exempt. The exemption currently amounts to 3.9375 percent of the purchase price of qualified property. Since the exemption is partial, recordkeeping will be key!

Companies benefitting from the California Manufacturing Exemption are those whose line of business falls into a qualifying NAICS code (3111 to 3399, 541711, or 541712), plus after January 1, 2018, those businesses engaged in business in NAICS codes 22111-221118 inclusive, and 221122.

The NAICS codes indicate the line of business the qualified company is primarily engaged in.

“Primarily engaged” is also defined in the proposed regulation as, “50 percent or more of gross revenues, including intra-company charges, are derived from manufacturing or R&D activities for the financial year of the purchaser preceding the purchase of the property.”
In order to claim the partial exemption for qualified purchases made, the purchaser must provide the seller with a timely executed Form CDTFA-230-M to obtain the reduced rate.

Note that this partial exemption can be retroactive (i.e. subject to refund) to companies that may not have taken advantage of the reduced benefit at the time they purchased qualified equipment. If a company has directly paid use tax to the state on the amount of property purchased, it can go back (subject to the statute of limitations) and request a refund directly from the CDTFA. In the event where a company paid sales tax to a vendor, the process is a little more complicated in that the company would have to reach out to the vendor for the refund. Do you find this a little confusing? We can help with that!

For more information, check out our blog post about this benefit (link below) and the CDTFA’s website.

Have a question? Contact Monika Miles Group.