United States

California: Cap and Trade Legislation Extends and Expands Partial Manufacturing and R&D Exemption

Jul 24, 2017
From KPMG TaxWatch

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A recently-passed bill, Assembly Bill 398, extending California’s cap and trade auction program also includes various changes to the state’s partial sales and use tax exemption for manufacturing and R&D equipment. The Governor is expected to sign this legislation. This partial exemption, which was adopted in 2013, applies to purchases of qualified tangible personal property used primarily (more than 50 percent) in certain manufacturing, processing, biotechnology, and R&D activities. Currently, such equipment is exempt from 3.9375 percentage points of the tax.

The partial exemption was scheduled to expire on July 1, 2022. Assembly Bill 398 extends the life of the exemption through June 30, 2030. Effective January 1, 2018, Assembly Bill 398 also expands eligibility for the exemption to taxpayers engaged in various types of power generation as determined by qualifying NAICS codes. These companies, while considered “manufacturers” under federal law, are currently precluded from taking advantage of the partial exemption because their activities do not fall within the qualifying NAICS codes. Special purpose buildings and foundations used as an integral part of the generation, production or storage and distribution of electric power will be considered “qualified tangible personal property.” Also effective January 1, 2018, certain agricultural businesses are eligible to qualify for the exemption. Finally, Assembly Bill 398 expands the “useful life” requirement. Under current law, equipment eligible for the partial exemption must have a “useful life” of one year or more, and this is generally determined with reference to whether the equipment is treated as a capital expenditure on the taxpayer’s income tax return. Under the bill, taxpayers that deduct certain purchases of qualifying tangible personal property will nevertheless qualify for the exemption. This provision appears to be retroactive to property that was purchased or leased on or after July 1, 2014 and before January 1, 2018. Taxpayers that have been assessed unpaid tax on such property or have paid tax that was assessed on such property are entitled to a refund of taxes paid. Taxpayers seeking a cancellation of any assessment or a refund under Assembly Bill 398 must file a request with the Department of Tax and Fee Administration by June 30, 2018.  Please contact Chris Craft at 858-750-7301 with questions on California’s partial sales and use tax manufacturing exemption.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.