The California Manufacturing Sales Tax Exemption, which went into effect July 1, 2014, allows certain manufacturers and biotech companies to exempt a portion of sales and use tax on purchases of qualified equipment used in manufacturing and R&D (research and development).
A couple of items worth noting:
- Purchased equipment needs to be used at least 50% in the process of manufacturing or R&D.
- Qualified taxpayers are those with cost centers in industry NAICS codes of 3111-3399 (manufacturing), 541711 (R&D in biotech) and 541712 (R&D, other).
What are the benefits of this use and sales tax exemption?
- Approximately 4% savings of the purchase price of qualified property.
- Because it’s a sales tax exemption, benefit is recognized immediately upon purchase.
Taking advantage of the California Manufacturer’s Sales Tax Exemption? Documentation is Key!
When it comes to this exemption, documentation is key! Although it may seem straightforward at first, sustaining the benefit is more complicated than simply issuing an exemption certificate. If you take advantage of this use and sales tax exemption, it’s important to remember:
- Qualified purchasers must be ready to document various levels of qualification and maintain supporting data. For example, review various company cost centers to see if any will qualify as an “establishment” for manufacturing or R&D purposes. Also, be ready to document usage in California for the required time period.
- The exemption is taken today, but the audit will come later. Current documentation is key, as unlike fine wine, financial data doesn’t get better with age. In the tax world, we often use the phrase “contemporaneous documentation.” In other words, pull together the documentation today because the people responsible may not be there in the future, or the asset may have moved, or the tracking software may have changed. If you’ve ever worked on a project where you are digging through old file boxes, you know what I mean.
- There may be financial statement impact if documentation is not adequate to support a qualified taxpayer, use of property, or type of property, among others. Consider this – your company places into service $10 million of qualified property, and thus claims a partial exemption of approximately $400,000. On your financial statements, you’ve capitalized a smaller amount of assets, and you are recording a lower amount of annual depreciation expense based upon the lesser overall cost reported. Now, imagine that your exemption is audited 3 years from now and disallowed (in total, or partially) because you don’t have supporting documentation. You have misstated your financial statements. And no financial auditor is going to be happy about that!
We Can Help!
Although the 13 pages of detailed regulations can be daunting, Miles Consulting can help you take maximum advantage of this valuable sales tax exemption!
- We’ll review all company operations to determine all business units that may qualify for the exemption and make sure to maximize your benefit.
- We’ll document each aspect of the process and test a sample of qualified assets like an auditor would (or will!) Our “deliverable” includes documentation of all these items in a convenient place in case of future audit.
- We’ll provide peace of mind! Similar to other documented tax “studies” (e.g. R&D, nexus, etc.), your financial auditor will take comfort in the advance documentation and support so that the 4% benefit is supportable. Most companies don’t consider doing their own R&D study – auditors like the third-party aspect of a detailed review, complete with memo, samples, etc. Similarly, this exemption should be independently reviewed and documented.
Miles Consulting has the experience and expertise to help you navigate this new exemption. Contact us today to schedule a free, no obligation consultation.
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 and the California Manufacturer’s Partial Sales Tax Exemption. To learn more, contact us today at www.MilesConsultingGroup.com.
Photo Credit: Colin Zhu