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

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

The regulation contains model exemption certificates, and certificates issued by the SBE will be in substantially the same form as that model.(46) Qualified persons who purchase or lease tangible personal property from a California retailer (or from a retailer outside California that is obligated to collect the use tax) must provide the retailer with a manufacturer's exemption certificate in order to claim the exemption. The manufacturer's use tax declaration must be completed by a qualified person to claim the exemption from use tax on purchases of tangible personal property from a retailer outside California who is not obligated to collect use tax.(47)

1. Manufacturer's Exemption Certificates

In general, the exemption will not be allowed by the SBE unless two elements are satisfied. First, the qualified person must furnish the retailer with a manufacturer's exemption certificate no later than 60 days after the date of the purchase. Second, the retailer must timely file a sales and use tax return claiming the exemption and, together with that timely return, provide the SBE with a copy of the manufacturer's exemption certificate.(48) Retailers claiming the exemption in timely filed returns, however, will not be required to furnish the SBE with copies of the exemption certificates for sales or leases of tangible personal property to a single qualified purchaser that do not exceed an aggregate total of $25,000 during a single calendar quarter.(49)

A retailer must retain each exemption certificate for a period of four years from the date on which the retailer claims a partial exemption based upon the certificate.(50) Within 45 days of the SBE's request, retailers must furnish to SBE any and all manufacturer's exemption certificates received from qualified persons, including certificates for aggregate sales or leases of $25,000 or less to a single qualified person during a single calendar quarter.(51)

2. Manufacturer's Use Tax Declaration

In general, the use tax exemption will not be allowed by the SBE unless two elements are satisfied. First, the qualified person must timely file a sales and use tax return or consumer use tax return for the period in which the purchase occurs and timely pay any applicable tax in full that is excluded from the (partial) exemption.(52) Second, the qualified person must attach a completed manufacturer's use tax declaration to the sales and use tax return or consumer use tax return that is timely filed with the SBE.(53)

Failure to file a timely return for an otherwise qualified purchase from a retailer not engaged in business in California, or failure to attach a completed manufacturer's declaration to such a timely filed return, constitutes a waiver of the use tax partial exemption for that purchase and, as a consequence, the partial exemption cannot be claimed on that purchase.(54)

F. One-Year Requirement And Conversion to Non-Qualified Use

The exemption does not apply to any sale, storage, use, or other consumption in California of property that, within one year from the later of the date of purchase or the date that the property was first placed into service by the purchaser in an exempt use is (1) removed from California, (2) converted from an exempt use to some other use not qualifying for the exemption, or (3) used in a manner not qualifying for the exemption.(55) Various technical rules are provided regarding when a transfer (directly or indirectly) of property (in whole or in part) will cause loss of the exemption.(56)