Partial Use Tax Exemption for Manufacturing and R&D


From July 1, 2014 through June 30, 2022, businesses can take advantage of a partial sales and use tax exemption on purchases of qualified manufacturing and research and development (R&D) equipment. In order to qualify for the partial exemption for businesses in manufacturing or in R&D in the fields of biotechnology or physical, engineering, and life sciences, purchased or leased equipment must be used at least 50% of the time for manufacturing purposes, must remain in California for at least a year, and should have a useful life greater than one year. The partial exemption reduces the tax rate to 3.3125%, plus any applicable district taxes. The following is an overview of the partial exemption:
Allows a partial exemption of:

  • 4.1875% from July 1, 2014 through December 31, 2016
  • 3.9375% from January 1, 2017 through June 30, 2022

Purchaser must meet all three conditions:

  • Be a qualified person
  • Purchase qualified tangible personal property (TPP)
  • Use the property for the purposes allowed by this law

Qualified Person – Defined

  • Engaged in manufacturing as described in the North American Industry Classification System (NAICS) Codes 3111 to 3399
  • Engaged in R&D in field of biotechnologies as described in NAICS Code 541711
  • Engaged in R&D in the fields of physical, engineering, and life sciences as described in NAICS Code 541712

Qualified Tangible Personal Property (TPP) – Defined

  • Machinery and equipment (purchased or leased)
  • Machinery and equipment, including components parts and devices such as belts, shafts, moving parts, and operating structures
  • Equipment or devices used or required to operate, control, regulate or maintain the machinery such as computers, data processing equipment, and computer software
  • Property used in pollution control
  • Solar power equipment
  • Material handling equipment
  • Out-of-state qualifying purchases
  • Special purpose buildings (discussed below)

Qualified TPP does not include:

  • Items that are expensed in a single tax year
  • Property placed in service and disposed of in the same year
  • Property used in a manner not qualifying for the exemption
  • Property converted from exempt use to a non-qualifying use
  • Items that are replaced on a regular basis of less than one year
  • Items removed from California within one year

Special Purpose Buildings

  • Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling processes such as clean rooms, climate controlled facilities, wind tunnels and linear accelerators, or that constitutes a research or storage facility used during these processes
  • For the entire building to qualify, no more than one-third of the usable volume of the building can be used for nonmanufacturing or other non-qualifying uses
  • A portion of the building may qualify
  • Buildings used solely for warehousing after completion of the processes are not included

Qualified Use – Defined

  • Any stage of manufacturing, processing, fabricating, refining, or recycling process
  • Research and development
  • Maintain, repair, measure, or test any qualified property
  • Materials or fixtures furnished and installed by a construction contractor

Useful Life – Defined

  • Property must have a useful life greater than one year
  • Capitalized for state income or franchise tax purposes

Annual Purchase Limitation

  • $200 million in qualified purchases per calendar year

Exemption Certificates

  • For equipment and machinery purchases provide Form BOE-230-M (Partial Exemption Certificate for Manufacturing, Research and Development Equipment)
  • For special purpose buildings provide Form BOE-230-MC (Construction Contracts – Partial Exemption Certificate for Manufacturing, Research and Development Equipment)
  • Report the reduced amount use tax when filing the Sales and Use tax return

Qualified Property Partial Exemption not previously claimed

  • Claim for refund is available when the full amount of sales tax was paid on a purchase qualifying for an exemption and the exemption was not previously claimed
  • Purchase must fall within the annual purchase limitation
  • Provide an exemption certificate along with supporting documents to the seller, who can issue a refund
  • Seller files a claim for the overpaid sales tax on the return filed for the period in which the property was purchased
  • If the transaction was subject to use tax, the purchaser may file a claim for refund directly with the BOE using Form BOE-101 (Claim for Refund or Credit)
  • Statute of limitation for refunds is three years after the filing date

If you have questions or would like more information, please contact Lorena Venegas at lvenegas@windes.com or 844.4WINDES (844.494.6337).