A primer on the California sales/use tax manufacturing equipment exemption

Tax Executive, The, Sept-Oct, 1995 by Eric J. Coffill

C. Qualified Person

Only a "qualified person" may claim the exemption. A "qualified person" is defined by the statute as any person that satisfies two requirements:(28) First, the qualified person must have first commenced trade or business activities in a new trade or business in California on or after January 1, 1994.(29) The second requirement is that the qualified person must be engaged in those manufacturing lines of business described in SIC Codes 2,000 to 3,999, inclusive.(30)

1. The New Trade or Business Requirement

A major limitation of the exemption is that it only applies to persons who first commence trade or business activities in California on or after January 1, 1994. (This is in sharp contrast to the manufacturer's investment credit, which contains no such limitation.(31) The new trade or business requirement is a highly technical one that is addressed in some detail in the regulation, There follows a general overview of the requirement.

First, "trade or business activities" does not mean the mere formation or organization of a corporation or other business entity that is intended to conduct a business. Thus, a corporation or business entity first conducts activities when it starts or commences the trade or business for which it was organized.(32) Second, a person will not be considered to have first commenced activities in a new trade or business in California on or after January 1, 1994 if, at any time within the 36 months preceding that date, that person or any related person was required to have secured a seller's permit for that trade or business or any other trade or business classified under the same division of the SIC Manual.(33) Third, a trade or business is not a new trade or business in California if, within the 36 months preceding the date that activities were first commenced in that trade or business in California, either the person claiming the exemption or any related person had conducted any activities in California in any trade or business classified under the same division of the SIC Manual.(34) Fourth, where a person or any related person is engaged in one or more trade or business activities in California, or has been engaged in one or more trade or business activities in California within the preceding 36 months, and thereafter commences an additional trade or business activity in California, that additional activity will be treated as a new trade or business only if it is classified under a different division of the SIC Manual than are any of the person's or related person's current or prior trade or business activities in California within the preceding 36 months.(35)

Fifth, where a person or any related person is engaged in trade or business activities wholly outside California and that person first commences doing business (as defined) in California after December 31, 1993, the newly commenced trade or business activity in California will be treated as a new trade or business.(36) Sixth, on or after January 1, 1995, in any case where a person acquires all or any portion of the assets of an existing trade or business that is doing business in California, the trade or business thereafter conducted by that person will not be treated as a new trade or business if the aggregate fair market value of the acquired assets used by that person in the conduct of the trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the person being used in the same trade or business both within and outside California.(37) Seventh, in any case where the legal form under which a trade or business activity is being conducted is changed, the change in form will be disregarded and the determination of whether the trade or business activity is a new business will be made by treating the person as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business.(38)