NEW SALES TAX PARTIAL EXEMPTION ON CERTAIN EQUIPMENT

California has enacted a new incentive that allows certain industries to claim an exemption (vs. an income tax credit) for the state portion of the sales and use tax on certain new or used assets purchased on or after July 1, 2014. Unlike the old sales tax credit, the new partial exemption will be available statewide and not limited to certain geographic locations. While the benefit amount is lower than the previous EZ program, businesses that are  unprofitable or otherwise not in a taxpaying position will benefit from this new exemption structure. 

Purchased or leased tangible personal property may qualify if used primarily for any of the following activities: 

    • Manufacturing, processing, refining, fabricating, or recycling; 

    • Research and development; 

    • To maintain, repair, measure, test any property being used for manufacturing; 

    • Processing, refining, fabricating, or recycling; 

    • For research and development; or 

    • As a special purpose building and/or foundation. 

Here is what you need to know to take advantage of this benefit. 

    • The partial exemption applies to purchases of qualified tangible personal property made on or after July 1, 2014 through June 30, 2022. 
    • Businesses can get a partial exemption (as opposed to an income tax credit) at the rate of 4.1875% through Dec. 31, 2016 (3.9375% Jan. 1, 2017-       June 30, 2022) from certain types of asset purchases if they are primarily (more than 50%) engaged in the following industries:

    3111 to 3399 of the NAICS (manufacturing processing, refining, fabricating, or recycling). 

    541711 and 541712 of the NAICS (biotechnology, or physical, engineering, and life sciences research and development).

    • An exemption certificate (see below) should be provided to the vendor of the qualifying equipment prior to purchase.

    • The program includes a cap of $200 million annually in aggregate qualified purchases per business/ per year. 

    • A claw-back, equal to the value of the SUT exemption, will apply if qualifying purchases are removed from the state, or used for non-qualified activities within one year of the purchase. 

    • Not available to certain financial institutions, extractive and agricultural taxpayers. 

The California Board of Equalization has issued a proposed regulation that would permit a broader application of the partial exemption to non-traditional manufacturers. Under the regulation, a non-traditional manufacturer with an establishment (i.e., economic unit) primarily engaged in manufacturing, processing, refining, fabricating, or recycling may claim the partial sales and use tax exemption. For example, a supermarket that engages in meat processing (i.e., cutting and packaging meats) would have a qualified establishment. Thus, purchases of meat cutting equipment qualify for the partial sales and use tax exemption. Final approval of the proposed regulation will likely occur in mid-September 2014. In order to receive the exemption, companies will need to provide an exemption certificate, Form BOE-230-M, to the seller at the time of purchase. A copy of the certificate is available at 
http://www.boe.ca.gov/pdf/boe230m.pdf.

For additional information, contact us at: 714-937-3900 or Jarin Maurer, CPA, MBT, jm@maurercpa.com.


California keeping a watchful eye on your 1031 Exchange.


If you own California Real Estate used in a trade or business or held for investment and you plan on entering into a 1031 transaction therefore, deferring your gain, be aware that California will soon be tracking your future real estate transactions to determine if, at some point, you owe California income tax on previously deferred state taxes.

Over the past few years many California residents who have looked to reduce their California income tax exposure on real estate transactions have entered into 1031 exchange's and subsequently moved out of California and into States with low or no State income taxes.  A typical example would be a California Investor utilizes a 1031 exchange to move their investments, tax deferred, out of California and into a State such as Nevada with no income tax.  At some future date, this investor will sell the newly acquired "non-California" property and take their profits rather than participating in another 1031 exchange.  This investor will pay federal Capital Gains Tax and other taxes, however, if a California return is not filed, how does California ever recoup the original deferred gain on the first 1031 transaction?

Recently, the State of California Assembly passed a Bill which added a new section to the California Tax & Revenue Code.  These sections provide that taxpayers in a 1031 Exchange that sell California Property and purchase Non-California replacement property will be required to file an annual information return with the state of California.  The State income taxes from California that were previously deferred will be due when and if the Investor sells their new property in the new State without entering into another 1031 Exchange.

Keep in mind that this new procedure takes place beginning on or after January 1, 2014.  If you would like more information concerning this information please do not hesitate to contact our office.