The list of criteria to qualify for this partial exemption can be quite complex. We suggest you take the time to determine if your business's purchases or leases qualify.
Qualified Person
A “qualified person” means a person who is primarily engaged in those lines of business described in the North American Industry Classification System (NAICS) Codes 3111 to 3399, inclusive, 541711, or 541712, or beginning January 1, 2018, 22111 to 221118, inclusive, and 221122, published by the United States Office of Management and Budget (OMB), 2012 edition. (See Understanding your NAICS code on Industry Topics tab)
These industries generally include those primarily engaged in the business of all forms of manufacturing, research and development in biotechnology, research and development in the physical, engineering, and life sciences and the generation and production, storage or distribution of electric power. (See Electric Power Generators or Distributors on the Industry Topics tab)
A qualified person may be “primarily engaged” either as a legal entity or as an establishment within a legal entity.
To be primarily engaged as a legal entity or as an establishment you must, in the prior financial year, either derive 50 percent or more of gross revenue (including inter-company charges) from, or expend 50 percent or more of operating expenses in a qualifying line of business. For purposes of research and development, gross revenues could be derived from, but are not limited to, selling research and development services or licensing intellectual property resulting from research and development. (See Research & Development on Industry Topics tab)
Alternatively, an establishment is primarily engaged if, in the prior financial year, it allocates, assigns or derives 50 percent or more of any one of the following to a qualifying line of business: (1) employee salaries and wages, (2) value of production, or (3) number of employees based on a full-time equivalency.
In cases where the purchaser was not primarily engaged in a qualifying line of business for the preceding financial year, the one-year period following the date of purchase of the property may be used.
Except as discussed below, a “qualified person” generally does not include:
- An apportioning trade or business, other than an agricultural trade or business described in subdivision (c)(1) of RTC section 25128, that is required to apportion its business income pursuant to subdivision (b) of RTC section 25128.
- A trade or business conducted wholly within this state, other than an agricultural trade or business described in subdivision (c)(1) of RTC section 25128, that would be required to apportion its business income pursuant to subdivision (b) of RTC section 25128 if it were subject to apportionment pursuant to RTC section 25101.
In general, these apportioning trades or businesses derive more than 50 percent of their gross business receipts from an extractive business activity, a savings and loan activity, or a banking or financial business activity as defined in subdivision (d) of RTC section 25128.
Please note: Prior to January 1, 2018, an agricultural trade or business described in subdivision (c)(1) of RTC section 25128 was also excluded from the definition of “qualified person” if it was required to apportion its business income pursuant to subdivision (b) of RTC section 25128, or would have been required to apportion its business income pursuant to subdivision (b) of section 25128 if it were subject to apportionment pursuant to section 25101.
Qualified Tangible Personal Property
“Qualified tangible personal property” includes, but is not limited to:
- Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
- Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party. (See Useful Life on Industry Topics tab)
- Operational equipment (i.e. computers, tablets, printers, servers) used to run the manufacturing equipment are eligible for the exemption under this program provided they are used for qualifying activities.
- Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state. (See Pollution Control on Industry Topics tab)
- Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included. (See Special Purpose Buildings on Industry Topics tab)
- Beginning January 1, 2018, the definition of qualified tangible personal property is expanded to include special purpose buildings and foundations used as an integral part of the generation or production, storage or distribution of electric power.
“Qualified tangible personal property” does not include:
- Consumables with a useful life of less than one year. Tangible personal property that is deducted under RTC sections 17201 and 17255 or section 24356 on a state franchise or income tax return shall be deemed to have a useful life of one or more years.
- Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process.
- Tangible personal property used primarily in administration, general management, or marketing. Even though your NAICS code is eligible for the exemption, purchases made for other activities of your operations (i.e. distribution, sales) are not eligible for the exemption.
Leases of qualified personal property may also qualify for the partial exemption. If the lease qualifies, any payments that are due and paid in the eligible period, July 1, 2014, through June 30, 2030, qualify for the partial exemption regardless of the lease inception date. (See Leases on Industry Topic tab)
Qualified Uses
The tangible personal property must be used primarily (50 percent or more of the time) in one of the following manners:
- Any stage of the manufacturing, processing, refining, fabricating, or recycling process
- Research and development
- To maintain, repair, measure, or test any qualified tangible personal property described by the above, or
- The generation or production, storage or distribution of electric power
- For use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person, provided that the qualified person will use the resulting improvement to real property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, the generation or production, storage or distribution, of electric power, or as a research or storage facility for use in connection with those processes. (See Construction Contractor on Industry Topics tab)
Under the amended law “generation or production” means the activity of making, producing, creating, or converting electric power from sources other than a conventional power source as defined in Section 2805 of the Public Utilities Code. “Storage and distribution” means storing or distributing through the electric grid, but not transmission of electric power to consumers regardless of source.
For purposes of this exemption, the manufacturing process begins from the point raw materials are received and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the activity has altered the product to its completed form, including packaging, if required.