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Tuesday, March 7, 2017

Manufacturers: Qualifying for the R&D Sales Tax Exemption


Beginning on July 1, 2014, and ending June 30, 2022, California manufacturers and certain researchers and developers may qualify for a partial exemption of sales and use tax on certain manufacturing and research and development (R&D) equipment purchases and leases. To be eligible for this partial exemption, you must meet all three of these conditions:

  • Be engaged in certain types of business (all manufacturing and certain types of R&D)
  • Purchase “qualified property”
  • Use that qualified property in a qualified manner

Who Is Eligible to Claim Exemption?
A “qualified person” is primarily engaged (50% or more of the time) in the lines of business described in the North American Industry Classification System (NAICS) Codes 311100 to 339999 (all manufacturing), inclusive, 541711 (Research and Development in Biotechnology) or 541712 (Research & Development in the Physical, Engineering and Life Sciences).

What Are Applicable Partial Exemption Rates?
July 1, 2014, to December 31, 2016 – The partial exemption rate for this period is 4.1875% off of the state level of sales tax of 7.5%.

January 1, 2017, to June 30, 2022 – The partial exemption rate for this period is 3.9375% off of the state level of sales tax of 7.25%.

The state rate during this period provides that sales of the qualifying property sold to a qualified person be taxed at a rate of 3.3125%.

Qualified businesses would still be responsible for paying the local and district level sales tax.

What Purchases Qualify?
Machinery and equipment purchased and used in a manufacturing or qualified R&D process will qualify for the exemption. Manufacturing starts at the point when raw materials are introduced into a process and ends at the point where the manufactured item has reached its completed form. 

The qualified equipment must be used in a qualified manner, “primarily” (defined as 50% or more of the time) in any stage of the manufacturing, processing, refining, fabricating or recycling process. Qualified equipment includes components parts such as belts and shafts and equipment used to regulate, control or maintain the qualified equipment.

How Do I Obtain the Partial Exemption?
In order to document the partially exempt sale, purchasers must provide sellers an exemption certificate for the qualified purchases. Purchasers don’t need to file an application to qualify for the partial sales tax exemption. Purchasers must provide a description of how the equipment will be used in a qualifying manner in their operations to support their qualifying manufacturing or R&D activities or process.

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