California’s Partial Exemption for Manufacturing & Research & Development
On July 1, 2014, California put into effect a partial sales and use tax exemption for purchases or leases of “qualified tangible personal property” by a “qualified person” for use in manufacturing or research and development. The exemption was expanded to include certain electric power generators and distributors used to generate, store, and distribute electric power in January 2018. The partial exemption reduced the state sales & use tax rate to 3.3125% plus any applicable district taxes.
How to Qualify for the Exemption
To qualify, a person or entity must be considered a “qualified person.” This includes those primarily engaged in specific North American Industry Classification System (“NAICS”) codes, primarily covering manufacturing, R&D, and electric power generation/distribution.
The partial exemption applies to purchases and leases of “qualified tangible personal property,” which includes:
- Machinery and equipment, including component parts such as belts, shafts, moving parts, and structures used to support the operating equipment
- Equipment and devices used to operate, maintain, or control the machinery
- Repair and replacement parts for the equipment with a useful life greater than one year
- Tangible personal property used in pollution control
- Special purpose buildings and foundations used as an integral part of manufacturing or research and development
To be considered “primarily engaged” in manufacturing, a person must have derived 50% or more of gross revenue (including inter-company charges) in the prior year from a qualifying line of business. Alternatively, more than 50% of operating expenses must have been expended in a qualifying line of business.
The exemption is claimed by issuing Form CDTFA-230-M to the seller, who should then apply the reduced tax rate.
Exceptions to the Partial Exemption
Although the partial exemption covers many items, it does not apply to:
- Purchases of tangible personal property exceeding $200 million in a calendar year
- Consumables with a useful life under one year
- Furniture, inventory, and equipment used in the extraction process
- Equipment used to store finished products
- Tangible personal property used primarily in administration, general management, or marketing
Manufacturing Aids
Items like dies, patterns, jigs, and tooling, even when used in manufacturing, remain taxable. These items are not incorporated into the final product to be sold and therefore do not qualify for the exemption.
Need Help Navigating California’s Sales Tax Rules?
Navigating sales and use tax laws in California can be challenging. Partner with a firm that has the experience and knowledge to guide you. Clarus Partners helps manufacturers and R&D businesses stay compliant and maximize exemptions.