Manufacturing, R & D Property Partially Exempt from CA Sales & Use Tax

Effective July 1, 2014, equipment acquired for use in manufacturing or research and development could be partially exempt from California’s sales and use tax under a new exemption that was recently signed into law by Governor Brown as part of Assembly Bill 93 and Senate Bill 90.

Currently California imposes a statewide sales and use tax rate of 7.5 percent (plus applicable district tax) on sales and leases of property. With the new exemption, businesses would only pay 3.3125 percent of the statewide sales and use tax, saving $41.88 for every $1,000 in purchases of qualifying property.

Tax-exempt property could include machinery and equipment; equipment and devices used or required to operate, control, regulate, or maintain the machinery; pollution control items; and certain special purpose buildings and foundations. To qualify for the exemption, the property must be used 50 percent or more in one of the following activities:

  • Manufacturing, processing, refining, fabricating, or recycling tangible personal property
  • Researching and developing
  • Maintaining, repairing, measuring, or testing any qualified property

There is a $200 million exemption limit per person on purchases of qualified property in any calendar year. The exemption applies to both sales and leases of qualifying property and expires on July 1, 2022, unless otherwise extended.

Items that do not qualify for the exemption include consumables with a useful life of less than one year, furniture and equipment used to store completed products once the manufacturing process is completed, and property used primarily in administration, general management, or marketing.

The exemption is available only to businesses classified under specified 2012 NAICS codes 3111–3399 (manufacturing), 541711 (biotech research and development), and 541712 (physical, engineering, and life sciences R&D). Businesses in other industries are ineligible for the exemption.