We recently posted an article about updates to California’s partial sales tax exemption available to manufacturers and companies engaged in R&D in the state. The exemption (in effect since July 2014) allows qualified manufacturers and biotech companies to exempt a portion of California sales and use tax on their purchases of qualified equipment used in manufacturing and research and development (R&D).
Qualified companies include those operating in the following NAICS code ranges: 311100 to 339999 (manufacturing), 541711 (R&D in biotech), or 541712 (R&D, other), or (as added by A.B. 398), 22111 to 221118, inclusive and 221122. Note that the definition is fairly restrictive with respect to qualified industries, and unfortunately does not include companies such as software developers or SaaS companies.
Many of our clients here in Silicon Valley are technology companies who may (or may not) fall directly into the qualified NAICS codes as their primary business, yet might still qualify for the partial exemption for some of their asset purchases. Here are some examples:
- A semiconductor manufacturer who engages in offshore production might still qualify for the exemption on equipment purchased and used for testing and R&D purposes within California.
- A technology hardware manufacturing company with its manufacturing facility located in California and purchasing equipment to be used in its manufacturing capacity qualifies for the partial exemption on its purchases.
- A software or SaaS company which falls outside of the qualified NAICS codes may qualify if it purchases equipment used strictly for R&D engaged in within California, as long as the company is able to separately account for these activities in an R&D cost center in the company’s records.
While the partial exemption is especially lucrative for companies purchasing and placing into service large and expensive pieces of equipment, we urge our clients to remember that computers, servers, and special purpose property used in R&D will often qualify, and the costs of these asset purchases (and related tax) can add up quickly, particularly for technology companies.
Are you a technology company or California manufacturer with additional questions about this exemption? Please feel free to contact us at email@example.com for more information or to schedule a consultation.
Other recent “California (CA)” posts by Monika Miles, CPA:
- Reminder: California Manufacturers' Sales Tax Exemption
- Technology Companies and the California Partial Sales Tax Exemption
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview
- CA District Taxes – Are You Calculating the Full Rate?