California Legislature—2013–14 Regular Session

Assembly Bill No. 486

Introduced by Assembly Member Mullin

(Coauthors: Assembly Members Donnelly, Patterson, and Perea)

(Coauthors: Senators Correa, Fuller, and Hill)

February 19, 2013

An act to add Section 6377.4 to Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

AB 486, as introduced, Mullin. Sales and use taxes: exemption: manufacturing research and development.

Existing sales and use tax laws impose taxes 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. That law provides various exemptions from those taxes.

The bill would exempt from those taxes, on and after January 1, 2014, the gross receipts from the sale of, and the storage, use, or other consumption of, qualified tangible personal property purchased by a qualified person for use primarily in manufacturing, processing, refining, fabricating, or recycling of property, as specified, qualified tangible personal property purchased for use by a contractor for specified purposes, as provided, and tangible personal property purchased for use by a qualified person to be used primarily in research and development, as provided.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in conformity with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

This bill would specify that this exemption does not apply to local sales and use taxes, transactions and use taxes, and specified state taxes from which revenues are deposited into the Local Public Safety Fund, the Education Protection Account, and the Local Revenue Fund.

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.  

The Legislature finds and declares all of the
following:

(a) California is one of only three states that tax the sale of
equipment used in manufacturing.

(b) While manufacturing is increasing in other parts of the
United States, it continues to decline in California.

(c) The Legislative Analyst’s Office has indicated that
exempting the sales and use tax “would reduce 'tax
pyramiding'--an economically distortionary feature of our tax
code whereby manufacturers pay sales tax on their equipment and
their customers then pay additional sales tax on the final product
itself. Moreover, such a policy change would bring California more
in line with sales tax policies of other states.”

(d) While California’s economy is recovering from the great
recession, it is important to find ways to accelerate economic
growth.

SEC. 2.  

Section 6377.4 is added to the Revenue and Taxation
Code, to read:

6377.4.  

(a) Beginning January 1, 2014, 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,
all of the following:

(1) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in any stage of the
manufacturing, processing, refining, fabricating, or recycling of
property, beginning at the point any raw materials are received by
the qualified person and introduced into the process and ending at
the point at which the manufacturing, processing, refining,
fabricating, or recycling has altered property to its completed form,
including packaging, if required.

(2) Qualified tangible personal property purchased for use by
a contractor purchasing that property for use in the performance
of a construction contract for the qualified person, who will use
the property as an integral part of the manufacturing, processing,
refining, fabricating, or recycling process, or as a storage facility
for use in connection with those processes.

(3) Qualified tangible personal property purchased for use by
a qualified person to be used primarily in research and
development.

(b) For purposes of this section:

(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 tangible personal 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.

(3) “Primarily” means 50 percent or more of the time.

(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, fabricating, 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
tangible personal property.

(6) “Qualified person” means either of the following:

(A) A person who is primarily engaged in those lines of business
described in Codes 3111 to 3399, inclusive, or 5112 of the North
American Industry Classification System (NAICS) published by
the United States Office of Management and Budget, 2012 edition.

(B) An affiliate of a person who is a qualified person pursuant
to subparagraph (A) if the affiliate is included as a member of the
qualified person’s unitary group for which a combined report is
required to be filed under Article 1 (commencing with Section
25101) of Chapter 17 of Part 11.

(7) (A) “Qualified tangible personal property” includes, but is
not limited to, all of the following:

(i) Machinery and equipment, including component parts and
contrivances such as belts, shafts, moving parts, and operating
structures.

(ii) Equipment or devices used or required to operate, control,
regulate, or maintain the machinery and equipment, including,
without limitation, computers, data processing equipment, and
computer software, together with all repair and replacement parts
with a useful life of one or more years, whether purchased
separately or in conjunction with a complete machine and
regardless of whether the machine or component parts are
assembled by the qualified person or another party. Any repair
and replacement parts that the qualified person treats as having a
useful life of one or more years for state income or franchise tax
purposes shall be presumed to have a useful life of one or more
years for purposes of this section.

(iii) Qualified tangible personal property used in pollution
control that exceeds standards established by this state or any local
or regional governmental agency within this state.

(iv) 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. Buildings used solely for warehousing
purposes after completion of those processes are not included.

(B) “Qualified tangible personal property” does not include any
of the following:

(i) Consumables with a useful life of less than one year.

(ii) Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products that have
completed the manufacturing process.

(iii) Tangible personal property used primarily in administration,
general management, or marketing.

(8) “Refining” means the process of converting a natural
resource to an intermediate or finished product.

(9) “Research and development” means those activities defined
in Section 174 of the Internal Revenue Code.

(10) “Useful life” for tangible personal property that is treated
as having a useful life of one or more years for state income or
franchise tax purposes shall be deemed to have a useful life of one
or more years for purposes of this section. “Useful life” for tangible
personal property that is treated as having a useful life of less than
one year for state income or franchise tax purposes shall be deemed
to have a useful life of less than one year for purposes of this
section.

(c) An exemption shall not 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 retains the exemption
certificate in its records furnishes the board with a copy of the
exemption upon request. The exemption certificate shall contain
the sales price of the machinery or equipment that is exempt
pursuant to subdivision (a).

(d) (1) 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.

(2) Notwithstanding subdivision (a), the exemption established
by this section shall not apply with respect to any tax levied
pursuant to Section 6051.2, or 6201.2, or pursuant to Sections 35
and subdivision (f) of 36 of Article XIII of the California
Constitution.

(e) (1) Notwithstanding subdivision (a), the exemption provided
by this section shall not apply to any sale or use of property which,
within three years 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. The taxpayer that has
received the exemption under this section for purchasing qualifying
personal property shall notify the board if the property is either
removed from California, converted from an exempt use under
subdivision (a) within three years from the date of purchase, or
used in a manner not qualifying for the exemption.

(2) 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 three years from the
date of purchase, the purchaser (1) removes that property outside
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.

SEC. 3.  

This act provides for a tax levy within the meaning
of Article IV of the Constitution and shall go into immediate effect.