Tax Guide for Manufacturing, and Research & Development, and Electric Power Equipment & Buildings Exemption
Industry Topics

Standard Transaction

You are a manufacturer of wooden furniture in California. You plan to expand your operations to meet the growing demands of your customers. As a result, you need to purchase new manufacturing equipment that includes a table saw, a drill press, and a lathe. You want to know if your purchases will qualify for the Manufacturing and Research & Development partial exemption.

First, you need to find out whether your company is a qualified person for the purposes of the partial exemption. You have been primarily engaged in business for several years as a manufacturer of wooden furniture. You determine your company's North American Industry Classification System (NAICS) code to be 337122. Since the NAICS code for your primary line of business is described within the range of 3111 to 3399, you determine that your company does qualify for the partial exemption.

Next, you examine whether the equipment you are purchasing qualifies for the partial exemption and whether it will be used in a qualifying manner. You are purchasing machinery and equipment with a useful life greater than one year. You plan to use the equipment at least 50 percent of the time for manufacturing purposes. Therefore, you have determined that your purchases qualify for the partial exemption.

Now that you have determined that both your business and purchases qualify for the partial exemption, you are ready to start buying equipment. You will need to download CDTFA-230-M, Partial Exemption Certificate for Manufacturing and Research & Development Equipment. Fill it out, print it, and sign it. Then give it to the retailer of the equipment at the time you make your purchase.

The retailer will charge or collect from you at a reduced tax rate, saving you 3.9375 percent in sales or use tax on the purchase of your equipment.

Understanding your NAICS code

To be considered a qualified person for the partial exemption, you must be primarily engaged in a line of businesses described in NAICS code 3111 to 3399 for manufacturers, 22111 to 221118, and 221122 for qualifying electric power generators or distributors, or 541711 or 541712 if you are engaged in research and development.

NAICS codes are used to classify business establishments by a six-digit code system. The first four digits represent the industry group, and the last two digits represent the specific industry. For example, a business that manufactures cardboard boxes will have a NAICS code of 322211:

• The first four digits (3222) represents Converted Paper Product Manufacturing.
• The last two digits (11) represents Corrugated and Solid Fiber Box Manufacturing.

Your business' NAICS code best describes your line of business, based on its primary revenues or primary operating expenses. If there is no six-digit NAICS code for your specific line of business, you may still qualify for the partial exemption if your business activities are reasonably described in a qualifying four-digit industry group.

It is important to remember that Revenue and Taxation Code (R&TC) section 6377.1 uses the 2012 edition of the NAICS codes to define a qualified person. To keep up with changes in the economy, Office of Management and Budget publishes a new NAICS edition every five years.

Please note: The six-digit NAICS codes for research and development were changed in the 2017 edition. In general, the 2012 NAICS codes 541711 and 541712 were replaced by 2017 codes 541713 – 541715. Again, only the 2012 NAICS codes are relevant in determining whether a person is engaged in a qualifying line of business.

Most businesses or entities will have one NAICS code that best describes their line of business. However, if your entity is not primarily engaged in a line of business described in a qualifying NAICS code and you operate separate establishments within the entity, that constitute separate “cost centers” or “economic units,” a separate establishment may qualify for the partial exemption if it is primarily engaged in a line of business described by a qualifying NAICS code. You must keep separate books and records for each establishment.

For more information, including frequently asked questions about NAICS codes, please visit NAICS.

Useful Life

Qualified tangible personal property must be treated as having a useful life of one or more years for state income or franchise tax purposes.

Generally, for the partial exemption, property capitalized and depreciated on your state income or franchise tax returns will be regarded as having a useful life of one or more years.

If property is not capitalized and depreciated for income tax purposes, it will be presumed that the property does not have a useful life of one or more years and will not qualify for the partial exemption. However, transactions involving certain property that is not capitalized and depreciated for state income or franchise tax purposes may qualify for the partial exemption in the following situations:

• A qualified person deducts the cost of qualifying property according to R&TC sections 17201 and 17255 or 24356 (similar to section 179 of the Internal Revenue Code, but subject to lower deduction thresholds for state purposes). Please contact Franchise Tax Board for more information.
• A qualified person leases qualified machinery or equipment for one or more years, even if the lease payments are expensed for tax reporting purposes.
• Individual materials and fixtures purchased and installed as a component part(s) of a special purpose building and the special purpose building, in its entirety, will be depreciated for tax reporting purposes.

Examples of property that does not have a useful life greater than one year:

• Property placed in service and sold or otherwise disposed of in the same year.
• Tools and other supply items.
• Items that are not expected to have a useful life of one year, even if those items last beyond one year.
• Items that are replaced on a regular basis of less than one year.

Research & Development

Establishments that are primarily engaged in research and development in biotechnology, physical engineering, and life sciences may qualify for the partial exemption. To qualify for the partial exemption, the establishment must be classified under one of the following two NAICS codes: 541711, 541712.

(As noted above, the six-digit NAICS codes for research and development were changed in the 2017 edition. In general, the 2012 NAICS codes 541711 and 541712 were replaced by 2017 codes 541713 – 541715. Again, only the 2012 NAICS codes are relevant in determining whether a person is engaged in a qualifying line of business.)

Qualifying research and development activities may be defined as:

• Those activities described in section 174 of the Internal Revenue Code.
• Those activities undertaken for the purpose of discovering information that is technological in nature.
• Those activities undertaken to discover useful information for new or improved business components.

In general, there are two types of business components in which a taxpayer can claim that it was engaged in qualified research and development:

1. Product development, and
2. Process improvement.

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. Please see Understanding your NAICS code section above for details.

Electric Power Generation or Production, Storage or Distribution

On or after January 1, 2018, 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 NAICS codes (2012 edition).

• 221111 Hydroelectric Power Generation
• 221112 Fossil Fuel Electric Power Generation
• 221113 Nuclear Electric Power Generation
• 221114 Solar Electric Power Generation
• 221115 Wind Electric Power Generation
• 221116 Geothermal Electric Power Generation
• 221117 Biomass Electric Power Generation
• 221118 Other Electric Power Generation
• 221122 Electric Power Distribution

In general, qualifying electric power generators include 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:

• Operating electric power distribution systems (that is, consisting of lines, poles, meters, and wiring) or
• Operating as electric power brokers or agents that arrange the sale of electricity via power distribution systems operated by others.

For purposes of this partial exemption, solar electric power generators include those businesses that are primarily engaged in operating solar electric power generation facilities using 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).

Examples

The following are categories and examples of tangible personal property that may be used in the generation or production and/or storage and distribution of electric power (in some cases as part of a special purpose building). As always, whether or not the sale or use of a particular item of tangible personal property qualifies for the partial exemption is based on whether the three basic elements have been met: qualified person, qualified tangible personal property, and qualified use. (See Qualifications page).

Biomass electric power generation

Equipment used to convert renewable fuels into heat and electricity by direct combustion of biomass material, gasification, pyrolysis, and anaerobic digestion.

• Grinders, wood chip processors, baggers, hammermills, shredders, screening equipment, and auger systems
• Anaerobic digesters, and pumps
• Fixed or moving bed gasifiers, fluid bed gasifiers, and entrained flow gasifiers
• Bubbling fluidized bed pyrolyzers, circulating fluid bed and transported bed pyrolyzers
• Rotating torrefied shells, furnace, and dryers
• Fuel or feedstock receipt and storage equipment
• Belt conveyors, screw conveyors, drag conveyors, and pneumatic conveyors
• Direct combustion equipment, thermochemical conversion equipment, and biological conversion equipment

Solar electric power generation

Equipment that converts renewable energy from sunlight into electricity, either directly using photovoltaics, indirectly using concentrated solar power, or a combination.

• Inverters
• Switchgear and transformers
• Photovoltaic panels, concentrating mirrors and lenses, and trackers

Wind electric power generation

Equipment that converts wind energy to electric power.

• Engines, turbines, generators, and equipment housings

Geothermal electric power generation

Equipment that uses steam produced from geothermal reservoirs to generate electricity.

• Pipes, plumbing, and equipment necessary to remove and transfer geothermal energy to equipment that converts it to electric power
• Heat recovery steam generators, steam turbines, steam generators, condensers, cooling towers, water treatment equipment, heat transfer plumbing and storage systems and heat exchangers

Hydroelectric power generation (less than 30 megawatts)

Equipment that uses the movement of water to generate electricity.

• Dams and water conveyance systems and penstocks
• Electrolyzers and tanks
• Generators and power electronics converters

Electric power conversion and storage

Equipment that converts energy into another form, which can be stored and later reconverted to electricity on demand.

• Battery charging equipment
• Flywheels
• Capacitors, converters, corrosion control rectifier, motor, receiver, exciter, enclosures, rotors and stators, generators
• Cooling and heating systems
• Breakers, disconnects, and isolators
• Access control and monitoring equipment
• Energy conversion monitors and controllers, communications equipment, Supervisory Control and Data Acquisition (SCADA) equipment, protection equipment, power quality and metering equipment
• Support cranes, cables, and gear boxes
• Inverters
• Switches and switchgears
• Transformers

Electric power distribution equipment

• Fully dressed towers and poles, conductors, conduits, and insulators
• Transformers, regulators, or switchgears
• Fuses, reclosers, protective relays, circuit breakers, surge arrestors, Fault Location, Isolation, and Service Restoration (FLISR)
• Meters and other measuring devices, switches, remote terminal units (RTU), line sensors, and SCADA devices and controls

Leases

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 and Research & Development exemption.

For your company and oven lease, you:

• Determine that you will be primarily engaged in a line of business described in NAICS code 311230, because more than 50 percent of your gross revenue will be from manufacturing during the entire time you lease the oven.
• Will lease the oven for more than one year. The lessor did not make an election to report tax on the purchase price of the oven and will, therefore, collect tax on the lease receipts.
• Will use the oven more than 50 percent of the time for manufacturing purposes.

Your lease of the oven qualifies for the partial exemption. When you enter into the lease agreement, you can provide the leasing company a CDTFA-230-M 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 and Research & Development partial exemption is only in effect until June 30, 2030. Any lease payments due after June 30, 2030, will be subject to the full sales and use tax rate even if the lease began during the exemption period.

Construction Contractor

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, 2018, 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.

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. For this purpose, you may obtain a CDTFA-230-M prescribed by CDTFA, or use a similar form.

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). If 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.

Materials versus Fixtures

As explained in the Tax Guide for Construction Contractors, the performance of a construction contract generally involves the furnishing and installation of materials and/or fixtures that are incorporated into realty. Due to the unique nature of the manufacturing and research & development partial exemption, and the ability of the qualified person to pass the partial exemption on to a construction contractor that is furnishing and installing materials and/or fixtures as part of the construction of a special purpose building, a detailed explanation of the application of tax and the documentation requirements is provided below.

Contractors as Consumers

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 CDTFA-230-M 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 CDTFA 230-MC, Construction Contracts—Partial Exemption Certificate for Manufacturing, Research and Development Equipment to your suppliers.

Contractors as Retailers

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. Therefore, the construction contractor is generally regarded as a retailer of machinery and equipment that is furnished and installed in the connection of a construction contract.

As a retailer, 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, (see Subcontractors below).

Subcontractors

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 CDTFA-230-M or similar form that the qualified person provided to the prime contractor. The subcontractor must also obtain and retain in its records a CDTFA-230-MC 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.

Documenting the Exemption

The qualified person is responsible for issuing the CDTFA-230-M as evidence that the construction is for qualified tangible personal property. A prime or general contractor will be responsible for issuing a CDTFA-230-MC 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 CDTFA-230-M issued by the qualified person. Subcontractors must also issue a CDTFA-230-MC to their suppliers of materials or fixtures if purchased tax-paid.

Documenting the Annual Limit

Qualified persons are responsible for tracking their purchases to ensure they do not exceed the $200 million annual cap. All materials consumed by a contractor or subcontractor, or fixtures, machinery, or equipment sold by a contractor or subcontractor in the performance of a contract to construct or modify a special purpose building count against the $200 million annual limit of the qualified person. All construction contractors, including subcontractors, must make available cost information regarding all items sold or used in performance of a qualifying construction contract for purposes of tracking the qualified person's $200 million yearly exemption limit.

Special Purpose Buildings

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, 2018, 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.

All materials and fixtures that become a component part of the building will qualify for the partial exemption if no more than one-third (1/3) of the building's total usable volume (generally length × width × height) is devoted to a non-qualifying use, such as administrative purposes, parking, break rooms, etc. However, in those instances where more than one-third (1/3) of the total usable volume is devoted to a non-qualifying use, the only qualifying property for the partial exemption will be materials and fixtures that become a component part of the building used:

• in manufacturing, processing, refining, fabricating, or recycling, or
• as a research or storage facility for these processes, or
• in the generation or production, storage or distribution of electric power.

Calculating Usable Volume

Please see the examples below which illustrate examples of buildings that qualify entirely and buildings of which only a portion will qualify.

Example 1

ABC R&D Inc. is constructing a new research facility that is designed specifically for the type of research they conduct. The overall dimensions of the building are 400 feet long by 200 feet wide by 40 feet tall for a total usable volume of 3,200,000 cubic feet.

400' length × 200' width × 40' height = 3,200,000 cubic feet

The building will be partitioned to have offices for management, the accounting department, with 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 192,000 cubic feet.

80' length × 60' width × 40' height = 192,000 cubic feet used in a non-qualifying use

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:

192,000 cubic feet ÷ 3,200,000 cubic feet = 6% total volume used in a non-qualifying use

Since the total volume of the non-qualifying area is less than one-third (1/3) of the building's total usable volume, all the materials and fixtures that become a component part of the building will qualify for the partial exemption.

Example 2

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 200 feet long by 100 feet wide. Based on the schematics of the building, the foundation of the manufacturing floor will be 100 feet by 100 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 (100 feet by 100 feet). This area has a 10-foot ceiling. The total usable volume of the building is calculated as:

100' length × 100' width × 15' height = 150,000 cubic feet of area used in manufacturing

100' length × 100' width × 10' height = 100,000 cubic feet area of non-qualifying use

150,000 cubic feet + 100,000 cubic feet = 250,000 cubic feet of total usable volume

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.

The percentage of the building's volume used in a non-qualifying use is computed as:

100,000 cubic feet ÷ 250,000 cubic feet = 2/5th or 40% of the building's volume used in a non-qualifying use

Since more than one-third (1/3) of the total usable volume is used for a non-qualifying use, not all the materials and fixtures that become a component part of the building qualify for the partial exemption. 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. If you need additional help to determine whether the materials or fixtures qualify for the partial exemption, you may write to us with your non-confidential tax questions. You may also call our offices nearest you to speak with an audit team member for guidance.

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 is for the manufacturing floor and the other 50 percent is 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 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.

Location of Materials and Fixtures Installed in a Special Purpose Building

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.

If more than one-third (1/3) of the usable volume of a special purpose building is used for non-qualifying activities, only the materials or fixtures that are installed or used in the qualifying area may qualify for the partial exemption. 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, 400,000 cubic feet of a 1,000,000 cubic feet building is being used for administrative functions while the remaining 600,000 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.

Solar Power Equipment

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.

There are three ways that your solar power equipment may qualify for the partial exemption:

Directly Wired

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.

Wired to a Power Grid

Your solar power equipment may still qualify if:

• It is tied to the local power grid,
• It is not directly attached to qualifying manufacturing equipment, and
• 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: 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.

For example, your:

• Qualifying manufacturing equipment consumes 600 kilowatts of electricity per year, and
• Your solar equipment produces 1000 kilowatts of electricity per year.

Your solar power equipment is used 60 percent in manufacturing, (600/1000 = 0.60, or 60 percent). Therefore, it is used at least 50 percent in manufacturing and is eligible for the partial exemption.

Fixtures on a Special Purpose Building

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 used to power manufacturing equipment.

Pollution Control

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. Your business's primary line of business falls within one of the qualifying NAICS codes. 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.

Repair Parts

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. If 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.

To take advantage of the partial exemption you must download the CDTFA-230-M. Fill it out, print it, and sign it. Then provide it to the retailer at the time you make your purchase.

Cement Trucks

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 327320); 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 1661, Leases of Mobile Transportation Equipment.

Material–Handling 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.

Paying Use Tax on Qualifying Purchases

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 CDTFA. You may do so by reporting the purchase amount on your California sales and use tax return or consumer use tax return. There is no need to provide an unregistered, out-of-state seller with an exemption certificate.

To ensure that tax is reported at the partial rate when filing a return, you will need to report the qualifying purchase amount on the line Purchases Subject To Use Tax as well as on the line Sales Made Subject To The Manufacturing And Research And Development Equipment Exemption.

Shipping and Delivery Charges

Tax does not apply to separately stated shipping or delivery charges when delivery is made directly to the purchaser by common carrier, U.S. mail, or an independent contractor if the cost is the actual delivery charge. 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. (See publication 100, Shipping and Delivery Charges.)

Taxable shipping or handling charges added to sales or purchases that qualify for the partial manufacturing, research and development, and electric power equipment exemption are also partially exempt. For example, a qualified person purchases manufacturing equipment and pays $80 for “shipping and handling.” The actual shipping cost by the common carrier for delivery to the qualified person is $30. The $30 shipping charge is exempt from tax. Tax applies to the remaining $50 handling charge at the partial tax rate. To support the nontaxable shipping charges, the seller must keep records of the actual shipping costs.

Filing a Claim for Refund

If you purchased qualifying tangible personal property at the full tax rate you may be entitled to a refund or tax reimbursement of any overpaid tax.

For example, if you purchased machinery and paid tax at the rate of 7.25 percent and your purchase qualifies for the partial exemption, then the applicable tax rate for the transaction is 3.3125 percent. 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 us. Simply complete CDTFA-101, Claim for Refund or Credit, and mail it to the address provided. 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. The retailer would then file a claim for refund with us. As the purchaser, you will need to provide the retailer with a completed partial exemption certificate (CDTFA-230-M or similar form) and documentary evidence that the original purchase should have qualified for the partial exemption.

For more information on refunds, see publication 117, Filing a Claim for Refund.