BILL NUMBER: SB 47	INTRODUCED
	BILL TEXT


INTRODUCED BY   Senator Alquist

                        DECEMBER 13, 2010

   An act to add Section 6377 to the Revenue and Taxation Code,
relating to taxation, to take effect immediately, tax levy.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 47, as introduced, Alquist. Sales and use taxes: exemption:
manufacturing and research activities.
    The Sales and Use Tax Law imposes a tax on retailers measured by
the gross receipts from the sale of tangible personal property sold
at retail in this state, or on the storage, use, or other consumption
in this state of tangible personal property purchased from a
retailer for storage, use, or other consumption in this state, and
provides various exemptions from the taxes imposed by that law.
   On and after January 1, 2011, this bill would exempt from a
specified portion of those taxes, the gross receipts from the sale
of, and the storage, use, or other consumption of, specified tangible
personal property including property purchased for use by a
qualified person, as defined, in manufacturing, processing, or
fabricating of property, or use in research and development
activities.
   This bill would specify that this exemption does not apply to
local sales and use taxes or transactions and use taxes.
   This bill would take effect immediately as a tax levy.
   Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 6377 is added to the Revenue and Taxation Code,
to read:
   6377.  (a) On and after January 1, 2011, there are exempted from
the taxes imposed by this part the gross receipts from the sale of,
and the storage, use, or other consumption in this state of, by a
qualified person any of the following:
   (1) Tangible personal property that will become an ingredient or
component part of tangible personal property primarily manufactured,
processed, fabricated, or used in research and development
activities.
   (2) Tangible personal property directly and primarily used or
consumed in or during the actual manufacturing, processing,
fabrication, or research and development of tangible personal
property if the use or consumption of the property is necessary or
essential to the manufacturing, processing, fabrication operation, or
research and development, and directly makes or causes a chemical or
physical change to either of the following:
   (A) The product being manufactured, processed, fabricated, or used
in a research and development activity.
   (B) Any intermediate or preliminary product that will become an
ingredient or component part of the product being manufactured,
processed, fabricated, or used in a research and development
activity.
   (3) Actuators, steam production equipment and its fuel, in-process
flow through tanks, cooling towers, generators, heat exchangers,
transformers and the switches, breakers, capacitor banks, regulators,
relays, reclosers, fuses, interruptors, reactors, arrestors,
resistors, insulators, instrument transformers, and telemetry units
that are related to the transformers, electronic control room
equipment, computerized control units, pumps, compressors, and
hydraulic units that are primarily used to power, supply support, or
control equipment that qualifies for exemption under paragraph (2) or
paragraph (6) of this subdivision, or to generate electricity,
chilled water, or steam for ultimate sale.
   (4) Transformers located at an electric generating facility that
increase the voltage of electricity generated for ultimate sale, the
electrical cable that carries the electricity from the electric
generating equipment to the step-up transformers, and the switches,
breakers, capacitor banks, regulators, relays, reclosers, fuses,
interruptors, reactors, arrestors, resistors, insulators, instrument
transformers, and telemetry units that are related to the step-up
transformers.
   (5) Transformers that decrease the voltage of electricity
generated for ultimate sale and the switches, breakers, capacitor
banks, regulators, relays, reclosers, fuses, interruptors, reactors,
arrestors, resistors, insulators, instrument transformers, and
telemetry units that are related to the step-down transformers.
   (6) Tangible personal property primarily used or consumed in
manufacturing, processing, fabrication, or research and development
of tangible personal property if the use or consumption of the
property is necessary and essential to a pollution control process.
   (7) Lubricants, chemicals, chemical compounds, gases, or liquids
that are primarily used or consumed during manufacturing, processing,
fabrication, or research and development of tangible personal
property if their use or consumption is necessary and essential to
prevent the decline, failure, lapse, or deterioration of equipment
exempted by this section.
   (8) Gases used on the premises of a manufacturing plant or
facility used in performing research and development activities to
prevent contamination of raw material or product, or to prevent a
fire, explosion, or other hazardous or environmentally damaging
situation at any stage in the manufacturing or research and
development process, or in loading or storage of the product or raw
material on the premises.
   (9) Tangible personal property primarily used or consumed during
manufacturing, processing, fabrication, or research and development
of tangible personal property if the use or consumption of the
property is necessary and essential to a quality control process that
tests tangible personal property that is being manufactured,
processed, fabricated, or used in performing research and development
activities.
   (10) Tangible personal property primarily used or consumed in
manufacturing, processing, fabrication, or research and development
of tangible personal property if the use or consumption of the
property is necessary and essential to comply with federal, state, or
local laws, or rules and regulations that establish requirements
related to public health.
   (11) Tangible personal property specifically installed to do any
of the following:
   (A) Reduce water use and wastewater flow volumes from the
manufacturing, processing, fabrication, research and development or
repair operation.
    (B) Reuse and recycle wastewater streams generated within the
manufacturing, processing, fabrication, research and development, or
repair operation.
   (C) Treat wastewater from another industrial or municipal source
for the purpose of replacing existing freshwater sources in the
manufacturing, processing, fabrication, research and development, or
repair operation.
   (12) Chemicals, catalysts, and other materials that are primarily
used during a manufacturing, processing, fabrication, or research and
development operation to produce or induce a chemical or physical
change, to remove impurities, or to make the product more marketable.

   (13) Semiconductor, pharmaceutical or biotechnology fabrication,
or research and development clean rooms and equipment.
   (b) For purposes of this section, all of the following apply:
   (1) "Fabricating" means to make, build, create, produce, or
assemble components or property to work in a new or different manner.

   (2) "Manufacturing" means the activity of converting or
conditioning property by changing the form, composition, quality, or
character of the property for ultimate sale at retail or use in the
manufacturing of a product to be ultimately sold at retail.
Manufacturing includes any improvements to tangible personal property
that result in a greater service life or greater functionality than
that of the original property. Manufacturing also includes the
production of a publication for the dissemination of news of a
general character and of a general interest that is printed on
newsprint and distributed to the general public daily, weekly, or at
other short intervals. The manufacturing of computer software begins
with the design and writing of the code or program for the software
and includes the testing or demonstration of the software.
   (3) "Primarily" means tangible personal property used 50 percent
or more of the time in an activity described in subdivision (a).
   (4) "Process" means the period beginning at the point at which any
raw materials are received by the qualified person 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, if
required. Raw materials shall be considered to have been introduced
into the process when the raw materials are stored on the same
premises where the qualified person's manufacturing, processing,
refining, or recycling activity is conducted. Raw materials that are
stored on premises other than where the qualified person's
manufacturing, processing, refining, fabricating, or recycling
activity is conducted, shall not be considered to have been
introduced into the manufacturing, processing, refining, fabricating,
or recycling process.
   (5) "Processing" means the physical application of the materials
and labor necessary to modify or change the characteristics of
property.
   (6) "Qualified person" means a manufacturer or an entity
performing research and development.
   (7) "Research and development" means those activities that are
described in Section 174 of the Internal Revenue Code or in any
regulations thereunder. The research and development of computer
software begins with the design and writing of the code or program
for the software and includes the testing or demonstration of the
software.
   (8) "Semiconductor, pharmaceutical or biotechnology fabrication,
or research and development clean rooms and equipment" means all
tangible personal property, without regard to whether the property is
affixed to or incorporated into realty, used in connection with the
manufacturing, processing, fabrication, or research and development
in a clean room environment of a semiconductor, pharmaceutical, or
biotechnology product, without regard to whether the property is
actually contained in the clean room environment. The term includes
integrated systems, fixtures, and piping, all property necessary or
adapted to reduce contamination or to control airflow, temperature,
humidity, chemical purity, or other environmental conditions or
manufacturing or research and development tolerances, and production
equipment and machinery. The term does not include the building or a
permanent, nonremovable component of the building, that houses the
clean room environment. The term includes moveable clean room
partitions and clean room lighting.
   (c) No exemption shall be allowed under this section unless the
purchaser furnishes the retailer with an exemption certificate,
completed in accordance with any instructions or regulations as the
board may prescribe, and the retailer subsequently furnishes the
board with a copy of the exemption certificate. The exemption
certificate shall contain the sales price of the machinery or
equipment that is exempt pursuant to subdivision (a).
   (d) Notwithstanding any provision of the Bradley-Burns Uniform
Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200))
or the Transactions and Use Tax Law (Part 1.6 (commencing with
Section 7251)), the exemption established by this section shall not
apply with respect to any tax levied by a county, city, or district
pursuant to, or in accordance with, either of those laws.
   (e) (1) Notwithstanding subdivision (a), the exemption provided by
this section shall not apply to any sale or use of property that,
within one year from the date of purchase, is either removed from
California, converted from an exempt use under subdivision (a) to
some other use not qualifying for the exemption, or used in a manner
not qualifying for the exemption.
   (2) Notwithstanding subdivision (a), the exemption established by
this section shall not apply with respect to any tax levied pursuant
to Sections 6051.2 and 6201.2, or pursuant to Section 35 of Article
XIII of the California Constitution.
   (f) If a purchaser certifies in writing to the seller that the
property purchased without payment of the tax will be used in a
manner entitling the seller to regard the gross receipts from the
sale as exempt from the sales tax, and within one year from the date
of purchase, the purchaser (1) removes that property from California,
(2) converts that property for use in a manner not qualifying for
the exemption, or (3) uses that property in a manner not qualifying
for the exemption, the purchaser shall be liable for payment of sales
tax, with applicable interest, as if the purchaser were a retailer
making a retail sale of the property at the time the property is so
removed, converted, or used, and the sales price of the property to
the purchaser shall be deemed the gross receipts from that retail
sale.
   (g) This section applies to leases of tangible personal property
classified as "continuing sales" and "continuing purchases" in
accordance with Sections 6006.1 and 6010.1. The exemption established
by this section shall apply to the rentals payable pursuant to such
a lease, provided the lessee is a qualified person and the property
is used in an activity described in subdivision (a). Rentals that
meet the foregoing requirements are eligible for the exemption for a
period of six years from the date of commencement of the lease. At
the close of the six-year period from the date of commencement of the
lease, lease receipts are subject to tax without exemption.
  SEC. 2.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.