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How To Navigate The California Manufacturing Partial Sales And Use Tax Exemption



MONIKA MILES

The California Manufacturing Partial Sales and Use Tax Exemption, which went into effect July 1, 2014, allows certain manufacturers and biotech companies to exempt a portion of sales and use tax on purchases of qualified equipment used in manufacturing and R&D (research and development). While it’s been around for a few years, it’s still a viable benefit for companies purchasing equipment.

How To Take Advantage Of The California Manufacturing Partial Sales And Use Tax Exemption
Qualifications

To qualify, you need to meet the following criteria:

  • Be engaged in certain types of business primarily engaged (50 percent or more of the time) in those lines of business described in the NAICS Codes for:
    • Manufacturing (311100-339999)
    • R&D in biotechnology (541711)
    • R&D in the physical, engineering and life sciences (541712)
    • Generation and production, or storage and distribution of electric power (22111-221118, 221122)

  • Purchase “qualified tangible personal property.” This includes:
    • Machinery and equipment
    • Equipment or devices used or required to operate, control, regulate, or maintain the machinery
    • Tangible personal property used in pollution control that meets established governmental standards
    • Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating or recycling process, or that constitute a research or storage facility used during those processes
    • Special purpose buildings and foundations used as an integral part of the generation or production or storage and distribution of electric power
  • Use that qualified tangible personal property in a qualified manner at least 50 percent of the time. Qualified manners include:
    • Any stage of the manufacturing, processing, refining, fabricating or recycling process
    • R&D
    • To maintain, repair, measure or test any qualified tangible personal property described by the above
    • The generation or production, or storage and distribution of electric power
    • A contractor purchasing that property for use in the performance of a construction contract for a qualified person.
Benefits

Benefits of this sales and use tax exemption include:

  • Approximately 4 percent savings of the purchase price of qualified property.
  • Because it’s a sales and use tax exemption, the benefit is recognized immediately upon purchase.

Documentation

Proper documentation is incredibly important when taking advantage of the California Manufacturing Partial Sales and Use Tax Exemption.

If you plan to take advantage of the California Manufacturing Partial Sales and Use Tax Exemption, documentation is key!

Although it may seem straightforward at first, sustaining the benefit is more complicated than simply issuing an exemption certificate. If you take advantage of this sales and use tax exemption, it’s important to remember:

  • Qualified purchasers must be ready to document various levels of qualification and maintain supporting data. For example, review various company cost centers to see if any will qualify as an “establishment” for manufacturing or R&D purposes. Also, be ready to document usage in California for the required time period.
  • The exemption is taken today, but the audit will come later. Unlike fine wine, financial data doesn’t get better with age. In the tax world, we often use the phrase “contemporaneous documentation.” In other words, pull together the documentation today because the people responsible may not be there in the future, the asset may have moved or the tracking software may have changed. If you’ve ever worked on a project where you are digging through old file boxes, you know what I mean.
  • There may be financial statement impact if documentation is not adequate to support a qualified taxpayer, use of property or type of property, among others. Consider this – your company places into service $10 million of qualified property, and thus claims a partial exemption of approximately $400,000. On your financial statements, you’ve capitalized a smaller amount of assets, and you are recording a lower amount of annual depreciation expense based upon the lesser overall cost reported. Now, imagine that your exemption is audited three years from now and disallowed (in total, or partially) because you don’t have supporting documentation. You have misstated your financial statements. And no financial auditor is going to be happy about that.
Opportunities For Refunds

In the event your business finds itself in a position where it paid the full sales tax rate on equipment that is eligible for the partial exemption, all is not lost. Refunds can be obtained directly from California or through your vendors; the period available for refund will depend upon your or your vendors’ statute of limitation. Generally, the statute of limitation is three years, but could be extended depending upon your facts and circumstances.

We Can Help With The California Manufacturing Partial Sales And Use Tax Exemption

Although more than a dozen pages of detailed regulations can be daunting, Miles Consulting Group can help you take maximum advantage of this valuable tax exemption!

  1. We’ll review all company operations to determine all business units that may qualify for the exemption to make sure you maximize your benefit.
  2. We’ll document each aspect of the process and test a sample of qualified assets like an auditor would (or will!). Our “deliverable” includes documentation of all these items in a convenient place in case of future audit.
  3. We’ll provide peace of mind! Similar to other documented tax “studies” (e.g. R&D, nexus, etc.), your financial auditor will take comfort in the advance documentation and support so that the 4 percent benefit is supportable. Most companies don’t consider doing their own R&D study – auditors like the third-party aspect of a detailed review, complete with memo, samples, etc. Similarly, this exemption should be independently reviewed and documented.
  4. We’ll prepare, document and file refund claims with California or your vendors as well.

Have a question? Contact Monika Miles.

 

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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