STATE AND LOCAL TAX AND FINANCIAL SERVICES

Manufacturing Exemptions (MIND)

We assist companies with the identification and documentation required for the California new manufacturing exemption. There are a variety of requirements to qualify for the exemption that must be documented. It is important to contemporaneously prepare an audit ready binder to be prepared for SBE audit of these requirements.

Our team includes former senior California SBE auditors who have the experience to know how your manufacturing exemption will be audited and how to defend the exemption on audit.

Background

California enacted a partial sales/use tax manufacturing/research Exemption effective July 1, 2014. Initially, the state benefit from the Exemption will be 4.1875%. After the Education Protection Account tax expires on December 31, 2016, the partial exemption will be 3.9375% from January 1, 2017, to June 30, 2022.

Services

We develop an understanding of your business activities and tax compliance processes through the following procedures:

  1. Interviews to identify potential qualifying locations and activities;
  2. Tour and photograph your businessís facilities;
  3. Interview tax personnel to understand sales/use tax compliance process;
  4. Collect documentation after interviews and facility tour(s);
  5. Collect data from the general ledger to provide an estimate of Exemption benefit based on historical purchasing activity.

Qualification

Qualified Person Primarily Engaged

  • Analyze qualification as a ìQualified personî that is primarily engaged in a line of business described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American Industry Classification System (NAICS).
  • Evaluate various alternatives to document qualification at the legal entity of establishment level.

Qualifying Activities

  • Identify qualifying activities for the Exemption including the sale of and the storage, use, or other consumption in the state, for the following items:
    1. Qualified tangible personal property to be used primarily in any stage of:
      • manufacturing
      • processing
      • refining
      • fabricating
      • recycling
    2. Qualified tangible personal property purchased for use by a qualified person to be used. Primarily in research and development.
    3. Qualified tangible personal property purchased for use by a qualified person to be used. Primarily to maintain, repair, measure, or test any qualified tangible personal property described above.
    4. Qualified tangible personal property purchased for use by a contractor for the qualified person if to be used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with those processes.

Beginning and End of Qualifying Process

Define the Process period beginning at the point at which any 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 manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging.

  • Identify whether the Process includes testing products for quality assurance, which occurs prior to the tangible personal property being altered to its completed form, including packaging.
  • Identify when raw materials are stored on the same premises as the manufacturing, processing, refining, fabricating, or recycling activity.

Qualified Tangible Personal Property

Identify qualifying tangible personal property including:

  1. Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
  2. 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.
  3. Tangible personal property used in pollution control that meets or exceeds standards established by this state or any local or regional governmental.
  4. 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.

Documentation Procedures

  • Review all capital expenditures/purchases since July 1, 2014.
  • Review budget to identify potentially qualifying manufacturing activities.
  • Review purchasing activity for all qualified manufacturing purchases (non-CapEx)
  • Identify qualifying Vendors.
  • Review and provide appropriate exemption certificates to be provided to appropriate vendors.
  • Identify recoding necessary for sales tax system and/or accounts payable system.
  • Identify and ensure systems will reflect the correct tax rates.
  • Train staff, tax, IT, procurement and asset management departments, along with any relevant personnel.
  • Evaluate budgeted purchases to determine whether annual spend could exceed the $200 million limit in qualified purchases.
  • Technical memorandum that applies the statute and regulations definitions to your businessís facts to document:
    1. Qualifying Person
    2. Primarily engaged
    3. Qualifying Activities
    4. Beginning and end of Process
    5. Qualifying tangible personal property
  • Photographs of qualifying facilities, process and assets;
  • Narrative summaries of interviews
  • Vendor report identifying qualifying venders

Contact us to learn more

Phone: (714) 434-6700
Fax: (714) 640-8645