If you are primarily engaged in research and development as described above, your purchase or lease of machinery, equipment, or other devices that have a useful life of one or more years, and which will be used primarily for research and development will generally qualify for the partial exemption.
Example A university has a research and development department. Research and development is not the primary line of business of the University. Therefore, as an entity, the University is not primarily engaged in a line of business described by a qualifying NAICS code.
However, if the University can establish that the research and development department is a separate "establishment," then the research and development department may be qualified for purposes of the partial exemption. To be considered a separate establishment, the University must keep separate books and records for the research and development department. On or after January 1, , businesses that are primarily engaged in electric power generation or distribution may qualify for the partial exemption.
To qualify for the partial exemption, the business must be primarily engaged in a line of business described under one of the following North American Industry Classification System NAICS codes edition.
In general, qualifying electric power generators includes businesses primarily engaged in operating power generation facilities that convert other forms of energy, such as water power, fossil fuels, nuclear power, and solar power, into electrical energy. Establishments in this industry produce electric energy and provide electricity to transmission systems or to electric power distribution systems. In general, qualifying electric distributors includes electric power businesses primarily engaged in either:.
For purposes of this partial exemption, solar electric power generators include those businesses that are primarily engaged in operating solar electric power generation facilities that use energy from the sun to produce electric energy. The energy produced in these businesses is provided to electric power transmission systems or to electric power distribution systems. If you are a qualified person, your purchase of solar equipment or other electric power generating or producing equipment used to primarily run your manufacturing equipment may qualify for the exemption see the Solar Power Equipment topic on this page.
You are a new company that manufactures breakfast cereal and you are planning to acquire a new oven for manufacturing. You have decided to lease the oven instead of purchasing it and you want to know if your lease of the oven qualifies for the partial Manufacturing, Research and Development exemption.
Your lease of the oven qualifies for the partial exemption. When you enter into the lease agreement, you can provide the leasing company a Partial Exemption Certificate for Manufacturing, Research and Development Equipment to obtain the partial exemption from sales and use tax on the lease payments.
During your lease agreement, the leasing company will charge you a monthly lease payment, with tax separately added. However, the Manufacturing, Research and Development partial exemption is only in effect until June 30, Any lease payments due after June 30, , will be subject to the full sales and use tax rate even if the lease began during the exemption period.
You are a construction contractor hired by a manufacturer to build a special purpose building. Your sales or purchases of materials or fixtures that you furnish and install in the performance of a construction contract for a qualified person may qualify for the partial exemption.
Please note, beginning January 1, , the definition of "qualified tangible personal property" expanded to include special purpose buildings and foundations used as an integral part of the generation or production, storage or distribution of electric power. In order to document that the partial exemption applies, you must obtain from the qualified person, and keep in your records a valid partial exemption certificate signed by the qualified person. The exemption certificate must indicate that the qualified person and special purpose building meet the qualifications for the partial exemption, and that the property will be used in a qualifying manner.
Depending on the percentage of usable volume of a building being used in a qualifying manner, the entire building or only a portion of the building may qualify for the partial exemption see Special Purpose Buildings below. In the event that all materials and fixtures do not qualify for the partial exemption, it is necessary that the exemption certificate accurately lists the property to be purchased subject to the partial exemption.
As a construction contractor, you are generally a consumer of materials that you furnish and install in the performance of a construction contract.
Therefore, once you have obtained the required form CDTFAM, Partial Exemption Certificate for Manufacturing, Research and Development Equipment" or similar form from the qualified person indicating that the partial exemption applies, you may purchase materials to be furnished and installed on the special purpose building at the partially exempt rate by issuing a form " CDTFA MC, Construction Contracts-Partial Exemption Certificate for Manufacturing, Research and Development Equipment" to your suppliers.
As a construction contractor, you are generally regarded as a retailer of fixtures that are furnished and installed in the performance of a construction contract. You may issue a resale certificate when purchasing fixtures from a vendor. You may purchase fixtures for resale and sell them subject to the partial exemption to the qualified person. A construction contractor might install machinery and equipment in connection with a construction contract.
Such a sale of machinery and equipment is considered a sale and installation of tangible personal property, rather than an improvement to realty. As with a fixture, the construction contractor may generally purchase the property for resale and the subsequent sale to the qualified person will be subject to the partial exemption except where the retailer is the subcontractor, as discussed below.
The same rules discussed above apply when subcontractors are hired by a prime or general contractor to construct all or part of a special purpose building for the qualified person. In order to document that the partial exemption applies to the contract to construct the special purpose building, the subcontractor must obtain from the prime contractor and retain in its records a copy of the CDTFAM, Partial Exemption Certificate for Manufacturing, Research and Development Equipment or similar form that the qualified person provided to the prime contractor.
The subcontractor must also obtain and retain in its records a CDTFAMC, Construction Contracts - Partial Exemption Certificate for Manufacturing, Research and Development Equipment signed by the prime contractor for property the subcontractor is furnishing and installing for the prime contractor in order to document that the partial exemption applies.
The subcontractor may issue the necessary documentation as discussed above to their vendor, depending on whether the subcontractor is a consumer or a retailer of the property that is furnished and installed. The qualified person is responsible for issuing the CDTFAM as evidence that the construction is for qualified tangible personal property.
A prime or general contractor will be responsible for issuing a CDTFAMC to a supplier of materials or fixtures if purchased tax-paid. In addition, if the person furnishing and installing the materials is a subcontractor, the prime or general contractor will also need to provide the subcontractor with a copy of the CDTFAM issued by the qualified person.
If you construct a new special purpose building or modify an existing structure that is designed and constructed, or reconstructed, for manufacturing or research and development, or, beginning January 1, , for the generation or production, storage or distribution of electric power, your purchases of materials and fixtures that become part of the building, and machinery and equipment installed in the building, may qualify for the partial exemption.
In order to qualify be eligible , the special purpose building must be used for manufacturing, processing, refining, fabricating, recycling, or it may be used as a research or storage facility for these processes. Buildings such as warehouses, solely used to store product after it has completed the manufacturing process, are not eligible for the partial exemption. For example, a semiconductor manufacturer is constructing a building for manufacturing microchips. The building is designed and constructed with certain requirements to control temperature, humidity, and contaminants that are necessary for microchip production.
Materials and fixtures that become a component part of the building, as well as machinery and equipment purchased and installed in the building, are qualifying property for the partial exemption.
Please see the examples below which illustrate examples of buildings that qualify entirely and buildings of which only a portion will qualify. The overall dimensions of the building are feet long by feet wide by 40 feet tall for a total usable volume of 3,, cubic feet. The building will be partitioned to have offices for management, the accounting department, and the marketing department, and areas for restrooms and break rooms.
These areas will occupy an area of the building that measures 80 feet long by 60 feet wide by 40 feet tall for a total volume of , cubic feet. The remaining volume will be used for the research and development activities. The percentage of volume used in a non-qualifying use is computed as:. XYZ Manufacturing is constructing a new facility that is designed with specifications to house its widget manufacturing equipment and other administrative departments of its business.
The building will have a foundation that is feet long by feet wide. Based on the schematics of the building, the foundation of the manufacturing floor will be feet by feet and have a ceiling that is 15 feet tall to accommodate the large machinery. The offices for management, the accounting department, and the marketing department, restrooms, and break rooms will occupy the remaining floor area feet by feet. This area has a foot ceiling. The total usable volume of the building is calculated as:.
Even though the floor space of the manufacturing area is equal to the floor space of the rest of the building, the overall usable volume of the area of the manufacturing area is significantly greater than the volume of the rest of the building due to the higher ceiling.
Only the materials and fixtures that become a component part of the manufacturing area of the building will qualify. Qualified persons and contractors must know which purchases will qualify for the partial exemption. Determining which materials and fixtures will qualify may not be a straight allocation based on the ratio of qualifying volume to total volume. For instance, 50 percent of the foundation was for the manufacturing floor and the other 50 percent was for the administrative areas.
Thus, 50 percent of the materials to construct the foundation may qualify. Suspended ceilings will be installed only in the administrative offices.
This requires the use of specialized T-bar metal and ceiling tiles. Since none of these materials will be used in the manufacturing portion of the building, all of the T-bar metal and ceiling tiles used in the suspended ceiling are subject to the full tax rate. Also, the manufacturing equipment requires significantly more electrical output to run than does the area occupying the administrative functions.
The qualified person must identify which electrical materials are being used for manufacturing, a qualified use, and which materials are used for the area that is a non-qualifying use. Contractors involved in the project should be instructed to only purchase materials or sell fixtures at the partial tax rate if installed in the portion of the building used in manufacturing. To determine whether materials or fixtures installed in a special purpose building may qualify for the partial exemption, you must look at whether the installed items are being used for a qualifying portion of the building.
For example, if only half of the structure is used in the manufacturing process or for research and development, new light fixtures installed in the manufacturing and research and development area of the building will qualify. However, light fixtures installed in the administration area of the building will not qualify for the partial exemption. For example, , cubic feet of a 1,, cubic feet building is being used for administrative functions while the remaining , cubic feet is being used for manufacturing.
Since the useable volume of the administration area of the building is greater than one-third of the useable volume of the entire structure, the whole building will not qualify for the partial exemption. Any light fixtures installed in the manufacturing area of the structure will qualify for the partial exemption, while light fixtures installed in the administration area of the structure will not qualify for the partial exemption.
An air conditioning unit will be installed outside the manufacturing area, but will be used for cooling the whole building. The primary function of the air conditioning unit will be used to cool the manufacturing area since this area represents more than 50 percent of the building. The air conditioning unit will qualify for the partial exemption even though it is not physically located in the manufacturing area. If one-third or less of the useable volume of a special purpose building is used for a non-qualifying line of business, the entire building qualifies as a special purpose building.
If the entire building qualifies, where the materials or fixtures are installed or how they will be used will not matter, and all materials and fixtures installed will qualify for the partial exemption. For example, if the entire building qualifies and the employee restroom needs to be remodeled, all materials and fixtures that are installed to remodel the restroom qualify for the partial exemption. If you are a qualified person, your purchase of solar panels and solar power equipment used to primarily run your manufacturing equipment may qualify for the partial exemption.
If your solar power equipment is directly connected to qualifying manufacturing equipment to power the qualifying manufacturing equipment, your purchases of solar power equipment will qualify for the partial exemption. If your solar power equipment is tied to the local power grid and is not directly attached to qualifying manufacturing equipment, your solar power equipment may still qualify if it is designed to generate power primarily for your manufacturing equipment.
The solar equipment is deemed to generate power primarily for the qualifying manufacturing equipment if the solar power equipment is designed to generate at least 50 percent of the power used by the qualifying manufacturing equipment. To determine whether solar power equipment is used at least 50 percent in manufacturing, divide the annual amount of power consumed by qualifying manufacturing equipment by the total annual amount of power generated by the solar equipment. Please note that the power generated by the solar equipment when the facility is not operating is regarded as power that is effectively "banked" in the local power grid such that the calculation is not limited to those periods when the facility is operating.
Therefore, the solar power equipment is used at least 50 percent in manufacturing and is eligible for the partial exemption. If your solar power equipment is purchased as part of the construction of a qualifying special purpose building, then your solar equipment will qualify for the partial exemption regardless of the percentage of generated power that is used to power manufacturing equipment.
Property purchased for use in pollution control may qualify for the partial exemption. If you are a manufacturer and you install equipment used to reduce or remove pollution, your purchases of this equipment may qualify for the partial exemption. The pollution control equipment must meet or exceed state or local government standards at the time it is purchased. For example, you are in the printing industry.
You purchase a carbon absorber or catalytic reactor used to control pollution that meets or exceeds state or local government standards. Your purchase will generally qualify for the partial exemption. Your purchase of repair or replacement parts may qualify for the partial exemption.
If you are a qualified person purchasing parts that will be used to repair qualified manufacturing or research and development equipment, you may take advantage of the partial exemption. However, the repair or replacement parts must be treated as having a useful life of one or more years for state income or franchise tax purposes. Tools and other supply items are not considered repair or replacement parts and do not qualify for the partial exemption.
For example, you need to replace a motherboard in a computer that controls a certain piece of manufacturing equipment. As long as the motherboard has a useful life of one or more years as described above, you may purchase the replacement motherboard at the partially exempt tax rate.
Then provide it to the retailer at the time you make your purchase. Your purchase of a concrete or cement mixing truck may qualify for the partial manufacturing exemption. If you are primarily engaged in truck-mixed concrete manufacturing and will use the mixing truck primarily for this purpose, your purchase of a concrete or cement mixing truck may qualify for the partial exemption.
You are considered engaged in truck-mixed concrete manufacturing if your line of business is most accurately described by a qualifying NAICS code see NAICS code ; your NAICS code is that which best describes your line of business, based on either your primary revenues or primary operating expenses. Please note a construction contractor who owns a cement mixing truck would not generally qualify under a qualifying NAICS code.
Concrete or cement mixing trucks are considered Mobile Transportation Equipment for sales and use tax purposes. Leases of Mobile Transportation Equipment do not typically qualify for the partial exemption. Therefore, if you are a lessee of concrete or cement trucks, your lease will generally not qualify.
For more information on leases of mobile transportation equipment, please see Regulation , Leases of Mobile Transportation Equipment. Your purchases of material handling equipment such as forklifts, pallet jacks, and reusable transport containers may qualify for the partial exemption under certain uses.
If you are a qualified person purchasing material handling equipment with a useful life of one or more years that will be used primarily in a stage of the manufacturing process, it will qualify for the partial exemption.
The equipment must be for use in handling goods through a production line, and within a single geographic location. It will not qualify if the primary use is for handling goods after the establishment's production has completed, or used to transport unfinished goods from one geographic location to another. For example, you use a pallet jack to pick up a pallet of goods that has just completed one phase of processing and take it over to another area in the building to begin a second phase of processing.
Since the use of the pallet jack is at the same geographic location and it is used to move the materials between production phases, the pallet jack qualifies for the partial exemption. On the other hand, if you primarily use a forklift to move pallets of finished product from your warehouse onto delivery trucks for final shipment, it will generally not qualify for the partial exemption.
A forklift used to transport unfinished goods between two facilities at different geographic locations will also not qualify since the transportation to or between facilities is not considered a part of the manufacturing process.
If you are a manufacturer or research and developer and you make purchases of qualifying equipment from out-of- state sellers who do not collect tax, you may still take advantage of the partial exemption and pay your use tax at the reduced rate. Not all out-of-state retailers are registered to collect California use tax. If your supplier does not collect use tax, it is your obligation to self-report the use tax to the CDTFA. There is no need to provide an unregistered, out-of-state seller with an exemption certificate.
Tax does not apply to separately stated shipping or delivery charges when delivery is made directly to the purchaser by common carrier, U. However, tax generally applies to delivery charges when delivery is made using the seller's vehicle. Handling charges are generally subject to tax. If you charge a single amount for "postage and handling" or "shipping and handling," only the portion of the charge which represents the actual amount for shipping or delivery is not taxable, while the portion of the charge that represents handling is generally taxable for more information, see publication , Shipping and Delivery Charges.
Taxable shipping or handling charges added to sales or purchases that qualify for the partial manufacturing and research and development equipment exemption are also partially exempt.
To support the nontaxable shipping charges, the seller must keep records of the actual shipping costs. If you purchased qualifying tangible personal property at the full tax rate you may be entitled to a refund of any overpaid tax or tax reimbursement. For example, if you purchased machinery and paid tax at the rate of 7. A refund may generally be claimed at any time within the statute of limitations generally, within three years. If you are seeking a refund for overpaid taxes on qualifying purchases of manufacturing or research and development equipment the procedures are different depending on whether the original purchase was subject to sales tax or use tax.
If the tax you paid is use tax typically use tax applies when you purchase from an out-of-state vendor , you may file a claim for refund directly with the CDTFA.
Include as the reason for the refund that the property purchased qualifies for the manufacturing and research and development partial sales and use tax exemption. If the tax you paid was sales tax , you must request a refund from the retailer.
As the purchaser, you will need to provide the retailer with a completed partial exemption certificate CDTFAM or similar form and documentary evidence that the original purchase should have qualified for the partial exemption. For more information on refunds see publication , Filing a Claim for Refund. Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful:. To be eligible, they must meet all of these conditions: Be primarily engaged in certain types of business, also known as being a "qualified person.
Beginning January 1, , expanded the definition of "qualified tangible personal property" to include special purpose buildings and foundations used as an integral part of the generation or production or storage and distribution of electric power. Beginning January 1, , removed the exclusion from the definition of a "qualified person" for certain persons engaged in agricultural business activities that were previously excluded as an apportioning trade or business under RTC section Amended the definition of "useful life" to state that tangible personal property that is deducted on the California state franchise or income tax return under RTC sections and or section , is deemed to have a useful life of one or more years.
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