Those of you familiar with the old Manufacturers’ Investment Tax Credit may find the new California Manufacturing Exemption to be strikingly similar – but note that this version is a sales tax exemption versus a tax credit. The exemption reads much like the old statute and regulations under the Manufacturers’ Investment Tax Credit (“MIC”), which was a benefit from 1995 to 2003. (Yes – we’ve been around that long!) This new sales tax exemption is one of the three prongs of benefits that replaced the lucrative Enterprise Zone credits and deductions. For those of you not familiar with either incentive, we will give a brief overview of the new exemption this week.
The California Manufacturing Exemption begins July 1, 2014 and allows certain manufacturing and biotech companies to exempt from sales and use tax purchases of manufacturing and research and development (R&D) equipment. Purchased equipment or machinery must be used 50% or more during the manufacturing process. Equipment and machinery purchased and used for R&D qualifies as well. In any given calendar year, the combined amount of purchase must not exceed $200 million dollars. Any purchases beyond the $200 million threshold will not qualify. In addition, only part of the state tax portion of the sales tax is exempt. The exemption amounts to 4.1875% of the purchase price of qualified property. Since the exemption is partial, recordkeeping will be key!
Companies benefitting from the California Manufacturing Exemption are those whose line of business falls into a qualifying NAICS code. (Qualified NAICS codes are 3111 to 3399, 541711, or 541712.) Proposed regulations 1525.4 will provide a more detailed definition of a “qualified person”. The NAICS codes indicate the line of business the qualified company is primarily engaged in. “Primarily engaged” is also defined in the proposed regulation as, “50% or more of gross revenues, including intra-company charges, are derived from manufacturing or R&D activities for the financial year of the purchaser preceding the purchase of the property.”
Good recordkeeping for the California Manufacturing Exemption will be instrumental in assuring your company can survive an audit. Companies will ultimately be required to document, among others: NAICS qualification for lines of business, qualification of the property itself (use, etc.), and qualifying exemption amount (tax).
Our expertise with the former Manufacturers’ Investment Tax Credit and the legislative intent behind both laws qualifies us to provide the necessary practical experience relative to claiming this exemption. We cannot stress enough how important it will be to maintain good documentation to support the exemption of qualified property/qualified taxpayers. If the Manufacturers’ Investment Tax Credit was any indication, we recommend our assistance with this documentation. Give us a call!
Labhart Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit. To learn more, contact us today at www.LabhartMiles.com
