enclosed is the discussion paper ... - cdtfa.ca.gov · 450 n street, sacramento, ca 95814 po box...

STATE OF CALIFORNIA

CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATIONTAX POLICY BUREAU

450 N STREET, SACRAMENTO, CA 95814

PO BOX 942879, SACRAMENTO, CA 94279-0092

1-916-324-2373 • FAX 1-916-322-4530

www.cdtfa.ca.gov

February 27, 2020

Dear Interested Party:

Enclosed is the Discussion Paper on Regulation 1525.4, Manufacturing and Research and Development

Equipment. Staff would like to invite you to discuss the issue and present any additional suggestions

or comments. Accordingly, an interested parties meeting is scheduled as follows:

March 12, 2020

Room 122 at 9:00 a.m.

450 N Street, Sacramento, CA

If you would like to participate by teleconference, call 1-888-822-7517 and enter access code 5038418.

You are also welcome to submit your comments to me at the address or fax number in this letterhead

or via email at [email protected] by March 26, 2020. You should submit written comments

including proposed language if you have suggestions you would like considered during this process.

Copies of the materials you submit may be provided to other interested parties, therefore, ensure your

comments do not contain confidential information. Please feel free to publish this information on your

website or distribute it to others that may be interested in attending the meeting or presenting their

comments.

If you are interested in other Business Taxes Committee topics refer to the CDTFA webpage at

(http://www.cdtfa.ca.gov/taxes-and-fees/business-taxes-committee.htm) for copies of discussion

papers and calendars of current and prior issues.

Thank you for your consideration. Staff looks forward to your comments and suggestions. Should you

have any questions, please feel free to contact Business Taxes Committee staff member Robert Prasad

at 1-916-309-5296, who will be leading the meeting.

Sincerely,

Trista Gonzalez, Chief

Tax Policy Bureau

Business Tax and Fee Division

TG:rp

Enclosures

GAVIN NEWSOM Governor

NICOLAS MADUROS Director

mailto:[email protected]

http://www.cdtfa.ca.gov/taxes-and-fees/business-taxes-committee.htm

https://www.cdtfa.ca.gov/

Interested Party -2- February 27, 2020

cc: (all with enclosures)

Mr. Nicolas Maduros (MIC 104)

Ms. Katie Hagen (MIC 104)

Mr. Robert Tucker (MIC 83)

Ms. Susanne Buehler (MIC 43)

Ms. Michele Pielsticker (MIC 105)

Mr. Jason Mallet (MIC 25)

Mr. Wayne Mashihara (MIC 47)

Mr. Bill Hain (MIC 70)

Mr. James Dahlen (MIC 57)

Mr. Jason Parker (MIC 49)

Mr. Steven Mercer (MIC 25)

Ms. Ester Cabrera (MIC 23)

Mr. Jeff Vest (MIC 85)

Mr. Mike Loretta (MIC 100)

Mr. Bradley Heller (MIC 82)

Mr. David Levine (MIC 85)

Ms. Dana Brown (MIC 85)

Ms. Casey Tichy (MIC 85)

Ms. Christine Castillo (MIC 82)

Mr. Kevin Smith (MIC 82)

Ms. Kirsten Stark (MIC 50)

Ms. Lynn Whitaker (MIC 50)

Mr. Greg Buehrer (MIC 44)

Mr. Gentian Droboniku (MIC 67)

Mr. Marc Alviso (MIC 104)

Ms. Claudette Yang (MIC 104)

Ms. Karina Magana (MIC 47)

Mr. Bradley Miller (MIC 92)

Mr. Robert Wilke (MIC 50)

Mr. Robert Prasad (MIC 50)

DISCUSSION PAPER

Revisions to Regulation 1525.4, Manufacturing and Research & Development

Equipment

1

Issue

Whether the California Department of Tax and Fee Administration (CDTFA) should amend

Regulation 1525.4, Manufacturing and Research and Development Equipment, to clarify the

provisions of Revenue and Taxation Code section 6377.1, as amended by Assembly Bill 398 (AB

398) (Stats. 2017, Ch. 135) and Assembly Bill 131 (AB 131) (Stats. 2017, Ch. 252).

Background

Revenue and Taxation Code (RTC) section 6377.1 was enacted by Assembly Bill 93 (AB 93)

(Stats. 2013, Ch. 69) and amended by Senate Bill 90 (SB 90) (Stats. 2013, Ch. 70) to provide a

partial exemption from sales and use tax on certain manufacturing and research and development

equipment sales and purchases. The partial exemption applied to qualifying sales and purchases

made on or after July 1, 2014, and before July 1, 2022. Subsequently, CDTFA’s predecessor, the

Board of Equalization (BOE) adopted Regulation 1525.4, Manufacturing and Research and

Development Equipment, which was effective on September 25, 2014, and interprets the provisions

of RTC section 6377.1.

RTC section 6377.1 exempted qualifying sales and purchases from the state general fund taxes

and the State’s Education Protection Account tax. Accordingly, from July 1, 2014, to December

31, 2016, the partial exemption was 4.1875%. On December 31, 2016, the Education Protection

Tax expired and the statewide tax rate was reduced to 7.25%. As a result, the partial exemption

was reduced to 3.9375%. Despite the reduction in the partial exemption rate, qualifying sales and

purchases were and continue to be subject to a tax rate of 3.3125%, plus applicable district taxes.

In general, this partial exemption allows a qualified person, who purchases qualified tangible

personal property, and uses that property in a qualifying manner to purchase the property with a

reduced tax rate. In addition, a construction contractor who purchases tangible personal property

to be used in the construction of a special purpose building for a qualified person can also purchase

the property at the partially exempt rate.

Qualified Person

A “qualified person” is defined in Regulation 1525.4 subdivision (b)(8)(A) and includes businesses

primarily engaged in:

• Manufacturing described in North American Industry Classification System (NAICS)

(2012 edition) codes 3111 to 3399.

• Biotechnology Research & Development (R&D) described in NAICS code 541711:

businesses primarily engaged in conducting biotechnology research and experimental

development.

• Physical, Engineering, and Life Sciences R&D described in NAICS code 541712:

businesses primarily engaged in conducting research and experimental development

DISCUSSION PAPER


Equipment

(except biotechnology research and experimental development) in the physical,

engineering, and life sciences.

In accordance with RTC section 6377.1, Regulation 1525.4 subdivision (b)(8)(B) provides that a

“qualified person” does not include an apportioning trade or business that is required to apportion

its business income pursuant to subsection (b) of RTC section 25128 or a trade or business

conducted wholly within California that would be required to apportion its business income

pursuant to subsection (b) of RTC section 25128 if it were subject to apportionment pursuant to

RTC section 25101. This generally included apportioning trades or businesses that derive more

than 50-percent of their gross business receipts from an agricultural business activity, an extractive

business activity, a savings and loan activity, or a banking or financial business activity.

Qualifying Property

With respect to qualifying property, subdivision (b)(9)(A) of Regulation 1525.4 defines “qualified

tangible personal property” as:

• Machinery and equipment, including component parts and contrivances such as belts,

shafts, moving parts, and operating structures.

• Equipment or devices used or required to operate, control, regulate or maintain the

machinery, including, but not limited to, computers, data-processing equipment, computer

software, together with all repair and replacement parts with a useful life of one or more

years.

• Tangible personal property used in pollution control that meets or exceeds standards

established by California or any local or regional governmental agency within California.

• 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.)

Pursuant to subdivision (b)(9)(B) of Regulation 1525.4, “qualified tangible personal property”

does not include: consumables with a useful life of less than one year; furniture, inventory and

equipment used in the extraction process; equipment used to store finished products that have

completed the manufacturing, processing, refining, fabricating, or recycling process; and tangible

personal property used primarily in administration, general management, or marketing.

Subdivision (b)(13) of Regulation 1525.4 defines useful life and provides that 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 the

regulation. Conversely, it provides that 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.

2

DISCUSSION PAPER


Equipment

Qualifying Use

Subdivision (a) of Regulation 1525.4 explains that qualified tangible property must be used

primarily in a qualifying manner. In general, the partial exemption applies to qualified tangible

personal property purchased for use by:

(1) A qualified person to be used primarily in any stage of the manufacturing, processing,

refining, fabricating or recycling of tangible personal property;

(2) A qualified person to be used primarily in research and development;

(3) A qualified person to be used primarily to maintain, repair, measure, or test any qualified

tangible personal property described in (1) or (2) above; or

(4) A contractor purchasing that property for use in the performance of a construction contract

for the qualified person, provided that the qualified person will use the resulting

improvement on or to real property 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.

Subdivision (c) of Regulation 1525.4 provides that, when a purchase satisfies all the requirements

for the partial exemption, the purchaser must provide their vendor with a certificate to document

the partial exemption. According to subdivision (d) of Regulation 1525.4, qualified persons are

limited to $200 million in qualifying purchases in a calendar year.

After the adoption of Regulation 1525.4, AB 398 was chaptered and signed into law on

July 25, 2017 and AB 131 was chaptered and signed into law on September 16, 2017. Together

they amend RTC section 6377.1 to expand the definition of a qualified person, expand the

definition of qualified tangible personal property, expand the partial exemption to qualified

tangible personal property purchased for use by a qualified person to be used primarily in the

generation or production, or storage and distribution of electric power, extend the sunset date for

the law, and amend the useful life definition.

Initial Discussion Paper and Interested Parties Meeting

On March 13, 2018, we distributed an initial discussion paper and proposed amendments to

Regulation 1525.4 to the public. On April 11, 2018, CDTFA held a meeting with interested parties

to discuss our proposed amendments to Regulation 1525.4. After the meeting, written comments

were received from the California Taxpayers Association (CalTax) to suggest revisions to staff’s

proposed amendments (Exhibit 2).

We also met with PG&E and CalTax at PG&E’s Livermore training facility to get a better

understanding of the electric power industry and equipment used in transmission and distribution.

In addition, we met with the California Public Utilities Commission (CPUC) staff to learn about

industry regulation.

3

DISCUSSION PAPER


Equipment

4

Discussion

We have redrafted the proposed amendments to the regulation (Exhibit 1) to clarify the current

provisions of RTC section 6377.1. The following discussion of these proposed amendments are

organized in the order of the regulation.

Title

We amended the title of the regulation to reflect its application to the electric power industry. The

current regulation title, Manufacturing and Research and Development Equipment, refers to

industries that were qualified to purchase goods subject to the partial exemption at the time the

original law went into effect. With the addition of qualified tangible personal property purchased

for use by a qualified person to be used primarily in the generation or production, or storage and

distribution of electric power, we suggest amending the name of the regulation to Manufacturing,

Research and Development, and Electric Power Equipment.

Subdivision (a)

The subtitle in subdivision (a) was revised to Partial Exemption for Property Purchased for Use

in Manufacturing, Research and Development, and Electric Power Generation or Production,

Storage, or Distribution. Also, since AB 398 provides that the sunset date of this partial exemption

shall be extended until June 30, 2030, subdivision (a) was revised to reflect this change in the

applicable end date by removing 2022 and replacing it with 2030 in the first and third paragraphs.

This revision was also made in other areas of the regulation where the sunset date is mentioned.

Subdivision (a)(4) was added to the list of applicable qualifying situations. This provision allows

a partial tax exemption for purchases of qualified tangible personal property purchased for use by

a qualified person to be used primarily in the generation or production, storage, or distribution of

electric power. RTC section 6377.1 provides that the partial exemption applies to qualified

tangible personal property purchased for use by a qualified person to be used primarily in the

generation or production, or storage and distribution, of electric power.

It was discussed at the interested parties meeting and in CalTax’s comments that RTC section

6377.1 subsection (b)(12) states that “storage and distribution” means “storing or distributing

through the electric grid, but not transmission of, electric power to consumers regardless of

source.” Thus, a qualified person may store electric power, or a qualified person may distribute

electric power through the electric grid to satisfy the qualifying activity requirement. We agree

with this interpretation and changed the regulation throughout to replace “and” with “or” when

storage and distribution are referred to in the amendments.

The former subdivision (a)(4) was renumbered as (a)(5). The provisions of (a)(5) allow a partial

exemption for purchases of qualified tangible personal property purchased for use by a contractor

purchasing that property for use in the performance of a construction contract for a qualified person

provided the qualified person will use the resulting improvement on or to real property as an

integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a

DISCUSSION PAPER


Equipment

5

research or storage facility for use in connection with those processes. The amended statute

provides for the inclusion of the generation or production, storage, or distribution, of electric power

in the qualified person’s use for purposes of this subdivision. Accordingly, we propose to amend

subdivision (a)(5) to provide this clarification.

Subdivision (b)

Generation or Production

Subdivision (b) includes definitions of terms used in the regulation. A new definition was added

in subdivision (b)(2) to define “generation or production.” The statute defined “generation or

production” as “the activity of making, producing, creating, or converting electric power from

sources other than a conventional power source, as defined in section 2805 of the Public Utilities

Code.” We used the definition of “generation or production,” as provided in the statute and

included the definition of conventional power source, as defined in section 2805 of the Public

Utilities Code (PUC), so that one would not have to refer to the PUC to determine what a

conventional power source is. CalTax suggested changing the word “power” to “energy” in the

definition. Although the terms are often used interchangeably in the industry, we believe it is more

appropriate to use the term provided in the statute by the legislature. We also did not incorporate

CalTax’s suggested language that attempted to define a beginning point and ending point of

generation and production as we did not deem it necessary to add language to define the beginning

and ending points of generation and production. By adding in this definition, the remaining

subdivisions were renumbered accordingly. In renumbered subdivision (b)(7), reference to the

former subdivision (b)(3) was revised to (b)(4).

Qualified Person

The definition of “qualified person” in (b)(9)(A) was revised to include certain qualified persons

in the electric power industry beginning January 1, 2018. Specifically, AB 398 expanded the

definition of a “qualified person” to include, beginning January 1, 2018, persons primarily

engaged in those lines of business described in NAICS code 221111 to 221118, inclusive, and

221122. NAICS codes 221111 to 221118 include establishments engaged in hydroelectric, solar,

wind, geothermal, and biomass electric power generation. NAICS code 221122 is comprised of

electric power distribution establishments including those primarily engaged in either (1) operating

electric power distribution systems (i.e., consisting of lines, poles, meters, and wiring) or (2)

operating as electric power brokers or agents that arrange the sale of electricity via power

distribution systems operated by others. Accordingly, we revised the definition of a “qualified

person” to explain that qualified persons prior to January 1, 2018, include persons primarily

engaged in those lines of business described in NAICS codes 3111 to 3399, 541711, and 541712,

and that qualified persons on or after January 1, 2018 also include persons primarily engaged in

those lines of business described in 221111 to 221118, and 221122. In addition, renumbered

subparagraphs 2. and 4. of subdivision (b)(9)(A) were amended for clarity, tense, and punctuation.

Certain businesses are specifically excluded from being qualified persons as identified in

subdivision (b)(9)(B). RTC section 6377.1 previously excluded an apportioning trade or business

DISCUSSION PAPER


Equipment

6

that is required to apportion its business income pursuant to subsection (b) of RTC section 25128,

or a trade or business conducted wholly within California that would be required to apportion its

business income pursuant to subsection (b) of RTC section 25128 if it were subject to

apportionment pursuant to RTC section 25101. AB 398 amends RTC section 6377.1 to provide

that, on and after January 1, 2018, a qualified person shall not include an apportioning trade or

business, other than a trade or business described in paragraph (1) of subdivision (c) of Section

25128, that is required to apportion its business income pursuant to subdivision (b) of Section

25128, or a trade or business, other than a trade or business described in paragraph (1) of

subdivision (c) of Section 25128, conducted wholly within this state that would be required to

apportion its business income pursuant to subdivision (b) of Section 25128 if it were subject to

apportionment pursuant to Section 25101. Paragraph (1) of subdivision (c) of RTC section 25128

refers to an agricultural business activity. We revised subdivision (b)(9)(B) into two

subparagraphs to clarify that agricultural businesses are not excluded from the definition of a

“qualified person” on or after January 1, 2018.

Qualified Tangible Personal Property

Language was added to RTC section 6377.1 subdivision (b)(9)(A)(iv) to allow, beginning January

1, 2018, special purpose buildings used as an integral part of the generation or production or

storage and distribution of electric power. Accordingly, the definition of “qualified tangible

personal property” in subparagraph 4. of subdivision (b)(10)(A) was amended to add that,

beginning January 1, 2018, qualified tangible personal property includes a special purpose building

or foundation used as an integral part of the generation or production, storage, or distribution of

electric power. CalTax suggested in their submitted comments that we add three new

subparagraphs to include descriptions and examples of qualified tangible personal property used

in the generation or production, distribution, or storage of electric energy. However, the language

in the revised statute did not amend the definition of qualified tangible personal property with

respect to the electric power industry except as it relates to special purpose buildings. It was

deemed unnecessary to list specific equipment that is qualifying property in the regulation. Since

qualification also depends on how property is used by a qualified person, CalTax’s suggested

revisions were not incorporated.

Storage, Transmission, and Distribution

We added definitions as they relate to electric power for “storage” in (b)(14), “transmission” in

(b)(15), and “distribution” in (b)(16). Since the partial exemption applies to distribution, but not

transmission, of electric power, we researched whether we could have a bright line definition of

each term. Transmission and distribution both refer to the carrying of electricity through power

lines over distance. The most notable differences between transmission and distribution are the

level of voltage at which electricity is carried over the lines and the distance which it travels. Based

on our research, transmission generally refers to the carrying of electricity at high voltages, over

long distances to demand areas. Distribution generally refers to the carrying of electricity over

shorter distances at lower voltage, which is suitable for being furnished to customers.

CalTax suggested defining “distribution” as the carrying or delivery of electric energy at less than

DISCUSSION PAPER


Equipment

7

69 kV, or the carrying or delivery of electric energy that is subject to regulation by the CPUC.

They also suggested we define “transmission” as the carrying or delivery of electric energy that is

other than distribution. We considered these approaches but determined that finding a conclusive

definition for transmission and distribution based on kilovolts was not feasible. According to our

research, transmission voltage can be different for each electric utility company. In addition, while

the CPUC regulates distribution of electricity by the larger utility companies, it is our

understanding that other utilities such as Sacramento Municipal Utility District, Los Angeles

Department of Water and Power, and utilities operated by government agencies or private entities

are self-regulated. While the Federal Energy Regulatory Commission (FERC) regulates interstate

transmission, it does not regulate transmission that travels intrastate. Due to the various regulatory

authorities in this area, it is unreasonable to define distribution or transmission based on a specific

measure of kilovolts.

Based on our research, including information from the CPUC website, it is our understanding that

the rate a utility company charges its customer is generally based on costs incurred by the company

plus a preapproved rate of return, whether regulated by the CPUC or self-regulated. In other

words, it can recover its costs of distributing or transmitting electricity and a reasonable profit

from its customers. Since the rate recovery for transmission and the rate recovery for distribution

is based on a utility’s transmission and distribution costs separate from each other, it is also our

understanding that accounting of such expenditures is required to be maintained separately.

Therefore, the most reasonable and consistent way of defining transmission and distribution is

based on how each utility lists the property in its books and records.

The proposed definition of “distribution” includes a rebuttable presumption that qualified tangible

personal property is used for distribution if the accounting, or other records of the qualified person,

lists the property as a distribution asset. We define “transmission” as the carrying of electric power

at a voltage level that cannot be delivered directly to consumers. The definition further clarifies

that transmission begins immediately after electric power has been stepped-up to a voltage level

that cannot be delivered directly to consumers and ends immediately before electric power is

stepped-down to a voltage level that can be delivered to consumers. We also added a rebuttable

presumption that qualified tangible personal property is used for transmission if the accounting, or

other records of the qualified person, lists the qualified tangible personal property as a transmission

asset.

Useful Life

The renumbering of definitions moved the definition of “useful life” to subdivision (b)(17). In

addition, we amended language in renumbered subdivision (b)(17) to reflect the amendments to

RTC section 6377.1 made by AB 398. The additional language reads, “For purposes of this

paragraph, tangible personal property that is deducted under RTC sections 17201 and 17255 or

section 24356 shall be deemed to have a useful life of one or more years.” Amendments that were

suggested by CalTax were not incorporated as we deemed them to extend beyond the scope of the

statute.

DISCUSSION PAPER


Equipment

8

Subdivision (c)

The amendments in subdivision (c) are primarily non-substantive. In the first paragraph of

subdivision (c)(1), the reference to subdivision (c)(4) was changed to (c)(5) to correct a referencing

error in the original regulation. In the second paragraph of subdivision (c)(1), subdivision

(b)(8)(A) was changed to (b)(9)(A) as a result of renumbering other subdivisions, and in the fifth

paragraph, reference to subdivision (a)(4) was changed to (a)(5) for the same reason. In

subparagraphs 1. and 2. of subdivision (c)(3)(E), language was amended to include the new

qualifying persons and applicable NAICS codes on the form of an exemption certificate.

Subdivision (c)(3)(F) also includes a revision that changes the reference to newly renumbered

subdivision (b)(10)(A).

Subdivision (d)

The proposed amendments in subdivision (d) only include changing the sunset date of the

exemption period from the year 2022 to 2030.

Subdivision (e) and (f)

There are no changes in subdivision (e) and (f).

Subdivision (g)

The proposed amendments in this subdivision include only minor changes. First, the proposed

amendments change a reference to newly renumbered subdivision (b)(10)(A)4. in the second

paragraph of subdivision (g)(1). Second, the proposed amendments amend the reference to

renumbered subdivision (b)(9)(A) in subdivision (g)(2). Finally, the word “subdivision” in (g)(2)

were added where it was inadvertently left out of the regulation.

Subdivision (h)

In this subdivision, the word “Board” is changed to “Department” to reflect the CDTFA replacing

the Board of Equalization (BOE) as the administering tax agency. CDTFA replaced BOE in July

2017.

Appendix A

This appendix represents the exemption certificate designed for qualified persons to provide to

retailers as support of a valid partially exempt transaction. The title was amended to include

electric power equipment. In addition, the sunset date of the partial exemption period was

amended from 2022 to 2030. In the list of qualified uses, we revised the fourth item to include

generation or production, storage, or distribution of electric power as a qualifying use. The word

“personal” was added so that it reads “tangible personal property. The new qualified persons

provisions that allow a person primarily engaged in activities described in NAICS codes 221111

to 221118 and 221122 were also added to the certifying statement. Under the bulleted list, the

words “the property is” were added to the third and fourth bullet items. Finally, reference to

subdivision (b)(9) is changed to (b)(10) in the first footnote.

DISCUSSION PAPER


Equipment

9

Appendix B

Appendix B is the exemption certificate designed for use by a construction contractor who

purchases tangible personal property for the performance of a construction contract of a special

purpose building or foundation used by a qualified person. The title was amended similarly to

Appendix A. The sunset date was changed to 2030. Under the description of uses, language was

added to include “the generation or production, storage, or distribution of electric power.” The

new qualified persons provisions that allow a person primarily engaged in activities described in

NAICS codes 221111 to 221118 and 221122 were also added to the certifying statement. Other

minor amendments include adding “personal” so it reads “tangible personal property,” removing

the word “or” where it was no longer needed, and amending the reference to subdivision (b)(10)

in the first footnote.

Summary

For purposes of discussion, we drafted proposed amendments (see Exhibit 1) to Regulation 1525.4

to incorporate the RTC section 6377.1 revisions as amended by AB 398 and AB 131. Comments,

suggestions, and input from interested parties on this issue are welcome. Interested parties are

invited to participate in the March 12, 2020 interested parties meeting. The deadline for interested

parties to provide written responses regarding this discussion paper is March 26, 2020.

Prepared by the Business Tax and Fee Division’s Tax Policy Bureau.

Current as of 2/27/2020

Discussion Paper Exhibit 1 Staff’s Proposed Revisions Page 1 of 17

1

REGULATION 1525.4. MANUFACTURING, AND RESEARCH AND

DEVELOPMENT, AND ELECTRIC POWER EQUIPMENT.

Reference: Section 6377.1, Revenue and Taxation Code.

(a) PARTIAL EXEMPTION FOR PROPERTY PURCHASED FOR USE IN

MANUFACTURING, AND RESEARCH AND DEVELOPMENT, AND ELECTRIC POWER

GENERATION OR PRODUCTION, STORAGE, OR DISTRIBUTION. Except as provided in

subdivision (d), beginning July 1, 2014, and before July 1, 20302022, section 6377.1 of the

Revenue and Taxation Code (RTC) provides a partial exemption from sales and use tax for

certain sales and purchases, including leases, of tangible personal property as described in

this regulation.

For the period beginning July 1, 2014, and ending on December 31, 2016, the partial

exemption applies to the taxes imposed by sections 6051 (except the taxes deposited

pursuant to section 6051.15), 6051.3, 6201 (except the taxes deposited pursuant to section

6201.15), and 6201.3 of the RTC and Section 36 of Article XIII of the California Constitution

(4.1875%). The partial exemption does not apply to the taxes imposed or deposited

pursuant to sections 6051.2, 6051.5, 6051.15, 6201.2, 6201.5, or 6201.15 of the RTC, the

Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law,

or Section 35 of Article XIII of the California Constitution.

For the period beginning January 1, 2017, and ending on June 30, 20222030, the partial

exemption applies to the taxes imposed by sections 6051 (except the taxes deposited

pursuant to section 6051.15), 6051.3, 6201 (except the taxes deposited pursuant to section

6201.15), and 6201.3 of the RTC (3.9375%). The partial exemption does not apply to the

taxes imposed or deposited pursuant to sections, 6051.2, 6051.5, 6051.15, 6201.2, 6201.5,

or 6201.15 of the RTC, the Bradley-Burns Uniform Local Sales and Use Tax Law, the

Transactions and Use Tax Law, or Section 35 of Article XIII of the California Constitution.

Subject to the limitation set forth above, this partial exemption from tax applies to the sale of

and the storage, use, or other consumption in this state, of the following items:

(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 tangible personal 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 tangible

personal property to its completed form, including packaging, if required.


2


used primarily in research and development.


used primarily to maintain, repair, measure, or test any qualified tangible personal property

described in subdivision (a) (1) or (2).

(4) Qualified tangible personal property purchased for use by a qualif ied person to be

used primarily in the generation or production, storage, or distribution of electric power.

(5) (4) 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,

provided that the qualified person will use the resulting improvement on or to real property

as an integral part of the manufacturing, processing, refining, fabricating, or recycling

process, the generation or production, storage, or distribution of electric power, or as a

research or storage facility for use in connection with those processes.

(b) DEFINITIONS. For the purposes of this regulation:

(1) "Fabricating" means to make, build, create, produce, or assemble components or

tangible personal property to work in a new or different manner.

(2) “Generation or production” means the activity of making, producing, creating, or

converting electric power from sources other than a conventional power source, as defined

in section 2805 of the Public Utilities Code. Section 2805 defines conventional power

source as power derived from nuclear energy or the operation of a hydropower facility

greater than 30 megawatts or the combustion of fossil fuels, unless cogeneration

technology, as defined in Public Resources Code section 25134, is employed in the

production of such power.

(3)(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. Tangible

personal property shall be treated as having a greater service life if such property can be

used for a longer period than such property could have been used prior to the conversion or

conditioning of such property. Tangible personal property shall be treated as having greater

functionality if it has been improved in such a manner that it is more efficient or can be used

to perform new or different functions.


3

(4)(3) "Packaging" means to wrap, seal, box, or put together as a unit, but includes only

that packaging necessary to prepare the goods for delivery to and placement in the qualified

person’s finished goods inventory, or to prepare goods so that they are suitable for delivery

to and placement in finished goods inventory, including repackaging of such goods when

repackaging is required to meet the needs of a specific customer. Packaging necessary to

consolidate the goods prior to shipping or to protect them during transportation to the

customer shall not be considered to be "packaging" for purposes of this regulation.

(5)(4) "Pollution control" means any activity that results in the abatement, reduction, or

control of water, land, or atmospheric pollution or contamination by removing, altering,

disposing, storing, or preventing the creation or emission of pollutants, contaminants,

wastes, or heat, but only to the extent that such activity meets or exceeds standards

established by this state or by any local or regional governmental agency within this state at

the time the qualified tangible personal property is purchased.

(6)(5) "Primarily" means 50 percent or more of the time.

(7)(6) "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 as defined

in subdivision (b)(4)(3), if required. "Process" includes testing products for quality assurance

which occurs prior to the tangible personal property being altered to its completed form,

including packaging as defined in subdivision (b)(4)(3), 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.

(8)(7) "Processing" means the physical application of the materials and labor necessary

to modify or change the characteristics of tangible personal property.

(9)(8) (A) "Qualified person" means a person that is primarily engaged in a qualifying line

of business.

1. Prior to January 1, 2018, qualifying lines of business are those lines of business

described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American


4

Industry Classification System (NAICS) published by the United States Office of

Management and Budget (OMB), 2012 edition.

On and after January 1, 2018, qualifying lines of business are those lines of business

described in Codes 3111 to 3399, inclusive, 221111 to 221118, inclusive, 221122, 541711,

or 541712 of the North American Industry Classification System (NAICS) published by the

United States Office of Management and Budget (OMB), 2012 edition.

With respect to Codes 3111 to 3399, a person will not be precluded from the definition of

a "qualified person" when there is no applicable six digit NAICS code to describe their line

of business, provided that their business activities are reasonably described in a qualified

four digit industry group. For example, a business in the recycling industry may be regarded

as a qualified person when the activities of the establishment are reasonably described in a

qualified four digit industry group.

1. 2. For purposes of this subdivision, aA qualified person may be "primarily engaged" either

as a legal entity or as an establishment within a legal entity. "Legal entity" means "person"

as defined in RTC section 6005.

A person is "primarily engaged" as a legal entity if, in the prior financial year, the legal entity

derivedderives 50 percent or more of its gross revenue (including inter-company charges)

from, or expendedexpends 50 percent or more of its operating expenses in a qualifying line

of businessline of business described in Codes 3111 to 3399, inclusive, 541711 or 541712

of the NAICS. For example, a legal entity is a qualified person primarily engaged in a

qualifying line of business if the legal entity’s gross revenue from manufacturing constitutes

constituted 50 percent or more of the total revenue for the legal entity. For purposes of

research and development activities, revenues could be derived from, but are not limited to,

selling research and development services or licensing intellectual property resulting from

research and development activities.

A person is "primarily engaged" as an establishment if, in the prior financial year, the

establishment derivedderives 50 percent or more of its gross revenue (including inter-

company and intra-company charges) from, or expendedexpends 50 percent or more of its

operating expenses in, a qualifying line of business. Alternatively, an establishment is

"primarily engaged" if, in the prior financial year, it allocatedallocates, assignedassigns or

derivedderives 50 percent or more of any one of the following to or from a qualifying line of

business: (1) employee salaries and wages, (2) value of production, or (3) number of

employees based on a full-time equivalency.

For purposes of this test, the gross revenues may be derived from a combination of

activities in qualifying manufacturing lines of business and from qualified research and


5

development lines of business. For example, if a company derives derived 40% of its gross

revenues from qualified manufacturing activities and 40% from non-qualified manufacturing

activities; but, the remaining 20% of its gross revenues are derived from qualified research

and development contracts, the company would qualify because overall, 60% of itsthe gross

revenues are from qualifying activities in qualifying lines of business.

Similarly, the test for operating expenses from qualifying manufacturing or research and

development lines of business cited in the qualifying NAICS codes would be considered in

combination.

There may be more than one qualifying establishment within a legal entity.

In the case of a nonprofit organization or government entity, "primarily engaged" with regard

to gross revenue means 50 percent or more of the funds allocated to the entity or

establishment are attributable to a qualifying line of business.

In cases where the purchaser was not primarily engaged in qualifying manufacturing or

research and developmentlines of business activities for the financial year preceding the

purchase of the property, the one year period following the date of purchase of the property

will be used.

32. For purposes of this subdivision, "establishment" includes multiple or single physical

locations, (including any portion or portions thereof), and those locations or combinations of

locations (including any portion or portions thereof) designated as a "cost center" or

"economic unit" by the taxpayer, where a qualified activity is performed, and for which the

taxpayer maintains separate books and records that reflect revenue, costs, number of

employees, wages or salaries, property and equipment, job costing, or other financial data

pertaining to the qualified activity. A physical location may be described in more than one

NAICS code.

43. An entity or establishment primarily engaged in manufacturing activities may

purchase qualified tangible personal property subject to the partial sales and use tax

exemption for use in research and development or generating or producing, storing, or

distributing electric power, provided all other requirements for the exemption are met. An

entity or establishment primarily engaged in research and development may purchase

qualified tangible personal property subject to the partial sales and use tax exemption for

use in manufacturing or generating or producing, storing, or distributing electric power,

provided all other requirements for the exemption are met. An entity or establishment

primarily engaged in generating or producing, storing, or distributing electric power may

purchase qualified tangible personal property subject to the partial sales and use tax

exemption for use in manufacturing or in research and development, provided all other


6

requirements for the exemption are met. Where a person is primarily engaged as a legal

entity, that person shall be considered a "qualified person" for purposes of this regulation for

all purchases made by the legal entity, provided all other requirements of the exemption are

met. Where a person conducts business at more than one establishment then that person

shall be considered to be a "qualified person" for purposes of this regulation only as to

those purchases that are intended to be used and are actually used in an establishment in

which the purchaser is primarily engaged in those a qualifying line lines of business.

described in Codes 3111 to 3399, inclusive, 541711, or 541712.

(B) Notwithstanding subdivision (b)(8)(9)(A), "qualified person" does not include:

1. Prior to January 1, 2018, Aan apportioning trade or business that is required to apportion

its business income pursuant to subdivision (b) of RTC section 25128 or a.

2. A trade or business conducted wholly within this state that would be required to apportion

its business income pursuant to subdivision (b) of RTC section 25128 if it were subject to

apportionment pursuant to RTC section 25101.

In general, these apportioning trades or businesses derive more than 50 percent of their

gross business receipts from an agricultural business activity, an extractive business

activity, a savings and loan activity, or a banking or financial business activity as defined in

subdivision (d) of RTC section 25128.

2. On or after January 1, 2018, an apportioning trade or business that is required to

apportion its business income pursuant to subdivision (b) of RTC section 25128, or a trade

or business conducted wholly within this state that would be required to apportion its

business income pursuant to subdivision (b) of RTC section 25128 if it were subject to

apportionment pursuant to RTC section 25101, other than an agricultural business

described in paragraph (1) of subdivision (c) of RTC section 25128.

(10)(9) (A) "Qualified tangible personal property" includes, but is not limited to, all of the

following:

1. Machinery and equipment, including component parts and contrivances such as belts,

shafts, moving parts, and operating structures. For purposes of this subdivision,

manufacturing aids as described in Regulation 1525.1, Manufacturing Aids, may be

considered machinery and equipment, when purchased by a qualified person for use by that

person in a manner qualifying for exemption, even though such property may subsequently

be delivered to or held as property of the person to whom the manufactured product is sold.

The manufacturing aids must meet the useful life requirement of subdivision (b)(17)(13).


7

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 therefor, 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.

3. Tangible personal property used in pollution control that meets or exceeds standards

established by this state or any local or regional governmental agency within this state at

the time the qualified tangible personal property is purchased.

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. On or after January 1, 2018, this also includes

special purpose buildings and foundations used as an integral part of the generation or

production, storage, or distribution of electric power. Buildings used solely for warehousing

purposes after completion of those processes are not included. For purposes of this

subdivision:

a. "Special purpose building and foundation" means only a building and the foundation

underlying the building that is specifically designed and constructed or reconstructed for the

installation, operation, and use of specific machinery and equipment with a special purpose

and the construction or reconstruction of which is specifically designed and used exclusively

for the specified purposes as set forth in subdivision (a) (the qualified purpose). Special

purpose buildings and foundations also include foundations for open air structures that may

not have ceilings or enclosed walls but are used exclusively for the specified purposes as

set forth in subdivision (a).

b. A building or foundation is specifically designed and constructed or modified for a

qualified purpose if it is not economic to design and construct the building or foundation for

the intended purpose and then use the structure for a different purpose.

c. A building or foundation is used exclusively for a qualified purpose only if its use does

not include a use for which it was not specifically designed and constructed or modified.

Incidental use of a building or foundation for nonqualified purposes does not preclude the

structure from being a special purpose building and foundation. "Incidental use" means a

use which is both related and subordinate to the qualified purpose. A use is not subordinate

if more than one-third of the total usable volume of the building is devoted to a use which is

not a qualifying purpose.


8

d. If an entire building and/or foundation does not qualify as a special purpose building

and foundation, a qualified person may establish that a portion of the structure qualifies for

treatment as a special purpose building and foundation if the portion satisfies all of the

definitional provisions in this subdivision.

e. Buildings and foundations that do not meet the definition of a special purpose building

and foundation set forth above include, but are not limited to, buildings designed and

constructed or reconstructed principally to function as a general purpose industrial, or

commercial building; or storage facilities that are used primarily before the point raw

materials are introduced into the process and/or after the point at which the manufacturing,

processing, refining, fabricating, or recycling has altered tangible personal property to its

completed form.

f. The term "integral part" means that the special purpose building or foundation is used

directly in the activity qualifying for the partial exemption from sales and use tax and is

essential to the completeness of that activity. In determining whether property is used as an

integral part of manufacturing, all properties used by the qualified person in processing the

raw materials into the final product are properties used as an integral part of manufacturing.

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

1. Consumables with a useful life of less than one year.

2. Furniture, inventory, and equipment used in the extraction process, or equipment used to

store finished products that have completed the manufacturing, processing, refining,

fabricating, or recycling process. The extraction process includes such severance activities

as mining, oil and gas extraction.

3. Tangible personal property used primarily in administration, general management, or

marketing.

(11)(10) "Recycling" means the process of modifying, changing, or altering the physical

properties of manufacturing, processing, refining, fabricating, secondary or postconsumer

waste which results in the reduction, avoidance or elimination of the generation of waste,

but does not include transportation, baling, compressing, or any other activity that does not

otherwise change the physical properties of any such waste.

(12)(11) "Refining" means the process of converting a natural resource to an intermediate

or finished product, but does not include any transportation, storage, conveyance or piping

of the natural resources prior to commencement of the refining process, or any other

activities which are not part of the process of converting the natural resource into the

intermediate or finished product.


9

(13)(12) "Research and development" means those activities that are described in

Section 174 of the Internal Revenue Code or in any regulations thereunder. Research and

development shall include activities intended to discover information that would eliminate

uncertainty concerning the development or improvement of a product. For this purpose,

uncertainty exists if the information available to the qualified person does not establish the

capability or method for developing or improving the product or the appropriate design of

the product.

(14) “Storage” means storing electric power regardless of the source of the electric

power.

(15) “Transmission” means carrying electric power at a voltage level that cannot be

delivered directly to consumers. Transmission begins immediately after electric power is

stepped-up to a voltage level that cannot be delivered directly to consumers and ends immediately before electric power is stepped-down to a voltage level that can be delivered

to consumers. It is rebuttably presumed that qualified tangible personal property is used for

transmission if the accounting, or other records of the qualified person, lists the qualified

tangible personal property as a transmission asset.

(16) “Distribution” means carrying electric power, regardless of the source of the electric

power, to consumers at a voltage level that can be delivered directly to consumers. Distribution does not include the transmission of electric power. It is rebuttably presumed

that qualified tangible personal property is used for distribution if the accounting, or other records of the qualified person, lists the qualified tangible personal property as a distribution

asset.

(17)(13) "Useful life." Tangible personal property that the qualified person treats 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 regulation. Tangible

personal property that the qualified person treats 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 regulation. For the purposes of this paragraph, tangible

personal property that is deducted under RTC sections 17201 and 17255 or RTC section

24356 shall be deemed to have a useful life of one or more years.

(c) PARTIAL EXEMPTION CERTIFICATE.

(1) IN GENERAL. Qualified persons who purchase or lease qualified tangible personal

property from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must

provide the retailer with a partial exemption certificate in order for the retailer to claim the

partial exemption. If the retailer takes a timely partial exemption certificate in the proper

form as set forth in subdivision (c)(3) and in good faith as defined in subdivision (c)(5)(4),

from a qualified person, the partial exemption certificate relieves the retailer from the liability

for the sales tax subject to exemption under this regulation or the duty of collecting the use


10

tax subject to exemption under this regulation. A certificate will be considered timely if it is

taken any time before the seller bills the purchaser for the property, any time within the

seller’s normal billing or payment cycle, or any time at or prior to delivery of the property to

the purchaser.

On occasion a potential qualified person may not know at the time of purchase whether they

will meet the requirements for the purpose of claiming the partial exemption until the

expiration of the one year period following the date of purchase as provided in subdivision

(b)(9)(8)(A). The purchaser may issue a partial exemption certificate at the time of the

purchase based on the expectation that the purchaser will meet the requirements of the

regulation. If those requirements are not met, the purchaser will be liable for payment of

sales tax, with applicable interest as if the purchaser were a retailer making a retail sale of

the tangible personal property at the time the tangible personal property is purchased.

If the purchaser pays the full amount of tax at the time of purchase and later becomes

aware that the requirements of this regulation are met, they may issue a partial exemption

certificate to the retailer. If a retailer receives a certificate from a qualified person under

these circumstances, or if the retailer receives a certificate from a contractor purchasing

qualified tangible personal property for use in the performance of a construction contract for

a qualified person, the retailer may file a claim for refund as provided in subdivision (h).

The exemption certificate form set forth in Appendix A may be used as an exemption

certificate.

Contractors purchasing property for use in the performance of a construction contract for a

qualified person as described in subdivision (a)(5)(4), who purchase qualified tangible

personal property from an in-state retailer, or an out-of-state retailer obligated to collect use

tax, must provide the retailer with a partial exemption certificate in order for the retailer to

claim the partial exemption. If the retailer takes a timely partial exemption certificate in the

proper form as set forth in subdivision (c)(3) and in good faith as defined in subdivision

(c)(5), from the contractor, the partial exemption certificate relieves the retailer from the

liability for the sales tax subject to exemption under this regulation or the duty of collecting

the use tax subject to exemption under this regulation.

The exemption certificate form set forth in Appendix B may be used by construction

contractors as an exemption certificate when they are purchasing qualified tangible

personal property for use in a construction contract for a qualified person.

(2) BLANKET PARTIAL EXEMPTION CERTIFICATE. In lieu of requiring a partial

exemption certificate for each transaction, a qualified person may issue a blanket partial

exemption certificate. The partial exemption certificate forms set forth in Appendix A and


11

Appendix B may be used as blanket partial exemption certificates. In absence of evidence

to the contrary, a retailer may accept an otherwise valid blanket partial exemption certificate

in good faith if the certificate complies with the requirements set forth in this subdivision.

When purchasing tangible personal property not qualifying for the partial exemption from a

seller to whom a blanket exemption certificate has been issued, the qualified person or

contractor must clearly state in a contemporaneous document or documents such as a

written purchase order, sales agreement, lease, or contract that the sale or purchase is not

subject to the blanket partial exemption certificate.

If contemporaneous physical documentation, such as a purchase order, sales agreement,

lease, or contract is not presented for each transaction, any agreed upon designation which

clearly indicates which items being purchased are or are not subject to the partial exemption

certificate, such as using a separate customer account number for purchases subject to the

partial exemption, will be accepted, provided the means of designation is set forth on the

blanket exemption certificate.

(3) FORM OF PARTIAL EXEMPTION CERTIFICATE. Any document, such as a letter or

purchase order, timely provided by the purchaser to the seller will be regarded as a partial

exemption certificate with respect to the sale or purchase of the tangible personal property

described in the document if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of

the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. If the purchaser is not

required to hold a permit because the purchaser sells only property of a kind the retail sale

of which is not taxable, e.g., food products for human consumption, or because the

purchaser makes no sales in this state, the purchaser must include on the certificate a

sufficient explanation as to the reason the purchaser is not required to hold a California

seller's permit in lieu of a seller's permit number.

(D) A statement that the property purchased is:

1. To be used primarily for a qualifying activity as described in subdivision (a)(1) – (43), or

2. For use by a contractor purchasing that property for use in the performance of a

construction contract for the qualified person as described in subdivision (a)(54).

(E) A statement that the purchaser is:


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1. a person primarily engaged in a manufacturing business described in NAICS Codes 3111

to 3399, an electric power generation business described in NAICS Codes 221111 to

221118, an electric power distribution business described in NAICS Code 221122, or in

research and development activities as described in NAICS Codes 541711 and 541712

(OMB 2012 edition), or

2. a contractor performing a construction contract for a qualified person primarily engaged in

a manufacturing business described in NAICS Codes 3111 to 3399, an electric power

generation business described in NAICS Codes 221111 to 221118, an electric power

distribution business described in NAICS Code 221122, or in a research and development

activities as described in NAICS Codes 541711 and 541712 (OMB 2012 edition).

(F) A statement that the property purchased is qualified tangible personal property as

described in subdivision (b)(10)(A)(7)(A).

(G) A description of property purchased.

(H) The date of execution of the document.

(4) RETENTION AND AVAILABILITY OF PARTIAL EXEMPTION CERTIFICATES. A

retailer must retain each partial exemption certificate received from a qualified person for a

period of not less than four years from the date on which the retailer claims a partial

exemption based on the partial exemption certificate.

(5) GOOD FAITH. A seller will be presumed to have taken a partial exemption certificate

in good faith in the absence of evidence to the contrary. A seller, without knowledge to the

contrary, may accept a partial exemption certificate in good faith where a qualified person or

a contractor performing a construction contract for a qualified person provides a certificate

meeting the requirements provided in subdivision (c)(3).

(d) WHEN THE PARTIAL EXEMPTION DOES NOT APPLY. The exemption provided by

this regulation shall not apply to either of the following:

(1) Any tangible personal property purchased by a qualified person during any calendar

year that exceeds two hundred million dollars ($200,000,000) of purchases of qualified

tangible personal property for which an exemption is claimed by the qualified person under

this regulation. This limit includes fixtures and materials sold or used in the construction of

special purpose buildings and foundations.

For purposes of this subdivision, in the case of a qualified person that is required to be

included in a combined report under RTC section 25101 or authorized to be included in a

combined report under RTC section 25101.15, the aggregate of all purchases of qualified


13

personal property for which an exemption is claimed pursuant to this regulation by all

persons that are required or authorized to be included in a combined report shall not exceed

two hundred million dollars ($200,000,000) in any calendar year.

For the purposes of this subdivision, "calendar year" includes the period July 1, 2014 to

December 31, 2014, as well as the period January 1, 20302022 to June 30, 20222030.

Accordingly, for calendar years 2014 and/or 20302022, a qualified person may not exceed

$200,000,000 in purchases of qualified tangible personal property for which an exemption is

claimed by the qualified person under this regulation.

There is no proration of the $200,000,000 limit when the purchaser is a qualified person for

only a portion of a calendar year. For example, if the qualified person began business on

October 1, 2016, the qualified person may purchase up to $200,000,000 in qualified

tangible personal property in the three months of 2016 they were in business.

(2) The sale or storage, use, or other consumption of property that, within one year from

the date of purchase, is removed from California, converted from an exempt use under

subdivision (a) to some other use not qualifying for exemption, or used in a manner not

qualifying for exemption.

(e) PURCHASER’S LIABILITY FOR THE PAYMENT OF SALES TAX. If a purchaser

certifies in writing to the seller that the tangible personal 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 the purchaser exceeds the two-hundred-

million-dollar ($200,000,000) limitation described in subdivision (d)(1), or within one year

from the date of purchase, the purchaser removes that property from California, converts

that property for use in a manner not qualifying for the exemption, or 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

tangible personal property at the time the tangible personal property is so purchased,

removed, converted, or used, and the cost of the tangible personal property to the

purchaser shall be deemed the gross receipts from that retail sale.

(f) LEASES. Leases of qualified tangible personal property classified as "continuing sales"

and "continuing purchases" in accordance with Regulation 1660, Leases of Tangible

Personal Property – In General, may qualify for the partial exemption subject to all the

limitations and conditions set forth in this regulation. The partial exemption established by

this regulation may apply to rentals payable paid by a qualified person for a lease period

beginning on or after July 1, 2014, with respect to a lease of qualified tangible personal

property to the qualified person, which property is used primarily in an activity described in


14

subdivision (a), notwithstanding the fact that the lease was entered into prior to the effective

date of this regulation.

For purposes of this subdivision, in the case of any lease that is a continuing "sale" and

"purchase" under subdivision (b)(1) of Regulation 1660, the one-year test period specified in

subdivision (d)(2) of this regulation runs from the date of the first rental period which occurs

on or after July 1, 2014, provided that the other conditions for qualifying for the partial

exemption have been met. Any such rentals payable subject to the partial exemption shall

continue to be taxed at the partial rate after expiration of the one-year period and lasting

until such time as the lessee ceases to be a qualified person, converts the property for use

in a manner not qualifying for the exemption, uses the property in a manner not qualifying

for the partial exemption, or the partial exemption otherwise ceases to apply.

(g) CONSTRUCTION CONTRACTORS. The application of sales and use tax to

construction contracts is explained in Regulation 1521, Construction Contractors. The terms

"construction contract," "construction contractor," "materials," "fixtures," "time and material

contract," and "lump sum contract" used in this regulation refer to the definitions of those

terms in Regulation 1521. Nothing in this regulation is intended to alter the basic application

of tax to construction contracts.

(1) PARTIAL EXEMPTION CERTIFICATES. As provided in subdivision (c)(1),

construction contractors performing construction contracts for construction of special

purpose buildings and foundations should obtain a partial exemption certificate from the

qualified person (Appendix A). Contractors purchasing property from a retailer in this state

or engaged in business in this state for use in the performance of a qualifying construction

contract for a qualified person must timely furnish the retailer with a partial exemption

certificate in order for the partial exemption to be allowed (Appendix B).

If a contractor accepts a certificate from a qualified person for the construction of a special

purpose building or foundation and it is later determined that the building or foundation is

not a qualifying structure as provided in subdivision (b)(10)(9)(A)4., the qualifying person

will be liable for the tax as provided in subdivision (e). If a contractor issues a certificate to

its vendor to purchase tangible personal property for use in a construction contract for a

qualified person subject to the partial exemption, and instead uses those materials for

another purpose, the contractor will be liable for the tax as provided in subdivision (e).

(2) CONSTRUCTION CONTRACTORS AS QUALIFIED PERSONS. Equipment used by

a construction contractor in the performance of a construction contract for a qualified person

does not qualify for the partial exemption. For example, the lease of a crane used in the

construction of a special purpose building does not qualify. However, a contractor that is


15

also a qualified person as defined in subdivision (b)(9)(A)(8) may purchase property subject

to the partial sales and use tax exemption provided all requirements for exemption are met.

Like any other qualified person, a contractor making purchases qualifying for the exemption

is subject to the $200,000,000 limit provided in subdivision (d)(1) with regard to the

contractor’s purchases for his or her own use.

(3) $200,000,000 LIMIT. As explained in subdivision (d)(1), the $200,000,000 limit for the

partial exemption includes fixtures and materials sold or used in the construction of special

purpose buildings and foundations. In a time and material contract, the qualified person may

consider the billed price of materials and fixtures to be the purchase price of these items for

the purposes of the limit. In a lump-sum contract, the qualified person must obtain this

information from job cost sheets or other cost information provided by the construction

contractor.

(h) CLAIM FOR REFUND. Qualified purchasers, or contractors purchasing qualified

tangible personal property for use in the performance of a construction contract for a

qualified person, who paid tax or tax reimbursement to the seller or the Board Department

may file a claim for refund with the Board Department if the purchase was a use tax

transaction. However, if the purchase was a sales tax transaction, a claim for refund for

sales tax must be filed by the retailer who reported the sale and the qualified purchaser

must issue the seller a partial exemption certificate. In order to be timely, the claim for

refund must be filed with the Board Department within the period specified in section 6902

of the RTC.

Discussion Paper Exhibit 1

Staff’s Proposed Revisions Page 16 of 17

16

Appendix A

PARTIAL EXEMPTION CERTIFICATE FOR MANUFACTURING, AND RESEARCH & DEVELOPMENT, AND ELECTRIC POWER EQUIPMENT – SECTION 6377.1

This is a partial exemption from sales and use taxes at the rate of 4.1875% from July 1, 2014 to December 31, 2016, and at the rate of 3.9375% from January 1, 2017 to June 30, 20222030. You are not relieved from your obligations for the remaining state tax and local and district taxes on this transaction. This partial exemption also applies to lease periods occurring on or after July 1, 2014 and before July 1, 20222030, for leases of qualified tangible personal property even if the lease agreement was entered into prior to July 1, 2014.

I hereby certify that the tangible personal property described below and purchased or leased from:

SELLER'S/LESSOR’S NAME

SELLER’S/LESSOR’S ADDRESS (Street, City, State, Zip Code)

is qualified tangible personal property and will be used by me primarily (please check one):

1. for manufacturing, processing, refining, fabricating, or recycling;

2. for research and development;

3. to maintain, repair, measure, or test any property being used for (1) or (2) above; or

4. for the generation or production, storage, or distribution of electric power; or

5. as a special purpose building and/or foundation.

Description of qualified tangible personal property purchased or leased1

1 See Regulation 1525.4, subdivision (b)(10 9) for a description of what is included and excluded from “qualified tangible personal property.”

:

If this is a specific partial exemption certificate, provide the purchase order or sales invoice number and a precise description of the property being purchased. If you want this certificate to be used as a blanket certificate for future purchases, describe generally the type of property you will be purchasing and ask your vendor to keep this certificate on file.

I, as the undersigned purchaser, hereby certify I am primarily engaged in manufacturing, processing, refining, fabricating, or recycling as described in Codes 3111 to 3399 of the North American Industry Classification System (NAICS)2; or I am primarily engaged in biotechnology, or physical, engineering, and life sciences research and development as described in Codes 541711

2 Published by the US Office of Management and Budget, 2012 edition.

and 541712 of the NAICS; or I am primarily engaged in generating electric power as described in Codes 221111 to 221118 of the NAICS; or I am primarily engaged in distributing electric power as described in Code 221122 of the NAICS.

I understand that by law, I am required to report and pay the state tax (calculated on the sales price/rentals payable of the property) at the time the tangible personal property is so purchased, removed, converted, or used if:

• the purchase exceeds the $200 million limitation;

• the property is removed from California within one year of the date of purchase or lease;

• the property is converted for use in a manner not qualifying for the exemption; or

• the property is used in a manner not qualifying for the partial exemption.

NAME OF PURCHASER SIGNATURE OF PURCHASER, PURCHASER’S EMPLOYEE, OR AUTHORIZED REPRESENTATIVE PRINTED NAME OF PERSON SIGNING TITLE

ADDRESS OF PURCHASER

PERMIT NUMBER (IF YOU ARE NOT REQUIRED TO HOLD A PERMIT, EXPLAIN WHY) TELEPHONE NUMBER

EMAIL ADDRESS OF PERSON SIGNING DATE

Discussion Paper Exhibit 1

Staff’s Proposed Revisions Page 17 of 17

17

Appendix B

CONSTRUCTION CONTRACTS - PARTIAL EXEMPTION CERTIFICATE FOR MANUFACTURING, AND RESEARCH & DEVELOPMENT, AND ELECTRIC POWER EQUIPMENT – SECTION 6377.1

This is a partial exemption from sales and use taxes at the rate of 4.1875% from July 1, 2014 to December 31, 2016, and at the rate of 3.9375% from January 1, 2017 to June 30, 20222030. You are not relieved from your obligations for the remaining state tax and local and district taxes on this transaction.

I hereby certify that the tangible personal property described below and purchased from:

SELLER'S/LESSOR’S NAME

SELLER’S/LESSOR’S ADDRESS (Street, City, State, Zip Code)

is qualified tangible personal property and will be used by me in the performance of a construction contract for a qualified person who will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, the generation or production, storage, or distribution of electric power, or as a research or storage facility for use in connection with those processes.

Description of qualified tangible personal property purchased1:

1 See Regulation 1525.4, subdivision (b)(109) for a description of what is included and excluded from “qualified

tangible personal property.”

If this is a specific partial exemption certificate, provide the purchase order or sales invoice number and a precise description of the property being purchased. If you want this certificate to be used as a blanket certificate for future purchases, describe generally the type of property you will be purchasing and ask your vendor to keep this certificate on file.

I further certify I am performing a construction contract for a qualified person primarily engaged in manufacturing, processing, refining, fabricating, or recycling as described in Codes 3111 to 3399 of the North American Industry Classification System (NAICS)2

2 Published by the US Office of Management and Budget, 2012 edition.

NAME OF PURCHASER SIGNATURE OF PURCHASER, PURCHASER’S EMPLOYEE, OR AUTHORIZED REPRESENTATIVE PRINTED NAME OF PERSON SIGNING TITLE

ADDRESS OF PURCHASER

PERMIT NUMBER (IF YOU ARE NOT REQUIRED TO HOLD A PERMIT, EXPLAIN WHY) TELEPHONE NUMBER

EMAIL ADDRESS OF PERSON SIGNING DATE

; or primarily engaged in biotechnology, or physical, engineering, and life sciences research and development as described in Codes 541711 and 541712 of the NAICS; primarily engaged in generating electric power as described in Codes 221111 to 221118 of the NAICS; or primarily engaged in distributing electric power as described in Code 221122 of the NAICS.

I understand that if I use the property for any purpose other than indicated above, I am required to report and pay the state tax measured by the sales price of the property to me.

______________________________

Discussion Paper Staff's Proposed Revisions Regulation 1525.4

Exhibit 2 Page 1 of 8

April 27, 2018

Ms. Trista Gonzalez, Chief

Tax Policy Bureau

California Department of Tax and Fee Administration

450 N Street

P.O. Box 942879

Sacramento, CA 94279-0092

Dear Ms. Gonzalez,

Thank you for the opportunity to provide comments to CDTFA’s proposed amendments to CCR Title 18, Section 1525.4, relating to sales and use tax exemptions for qualified equipment.

Attached please find CalTax’s comments and suggestions for clarifying language to specified

regulatory provisions.

As some of the terms and definitions are very specific to the public utility and energy industry,

we’ve footnoted references to the Public Utilities Code, California Public Utilities Commission, Federal Energy Regulatory Commission, and the Internal Revenue Code as applicable. We’ve

also included examples of tangible personal property that is used in energy generation and

production, storage, and distribution to provide greater clarity – recognizing that energy

technologies are highly specialized may require more explicit explanation.

Please let me know if you have any questions and, if necessary, I can facilitate a meeting with

our industry experts.

Sincerely,

Therese Twomey

Director of State Fiscal Policy

California Taxpayers Association



As of April 27, 2018

Comments to California Department of Tax and Fee Administration’s

Proposed Regulation 1525.4 (Manufacturing and Research &

Development Equipment)

General Observations:

1. In 2014, California implemented a partial sales/use tax exemption for qualified

tangible personal property used in manufacturing and research-and-development

in order to incentivize economic activity. However due to significant under-

utilization, the program was modified in 2017 to expand eligibility to previously

ineligible businesses, and to promote power generation from renewable

resources.

Utilities specifically were made eligible to:

• Achieve the governor’s renewable portfolio standard – which requires that

at least 50 percent of retail sales of electricity by a utility be derived from

renewable resources by the year 2030.

• Address affordability of electricity in California – which currently has some

of the nation’s highest retail electricity prices and are anticipated to

increase due to additional investments in electric grid infrastructure to

accommodate higher renewable energy standards and electric vehicles.

• Directly benefit utility ratepayers, not shareholders, because reductions in

utility capital expenditures reduce the consumer electricity rates that are

established by the California Public Utilities Commission.

As sponsors of the legislative proposals that effectuate the expansion and

extension of this exemption, we look forward to working with the California

Department of Tax and Fee Administration to draft qualification/eligibility criteria

that maximizes utilization, economic growth, and renewable energy production.



Specific Comments:

1. The proposed regulatory language defines “generation or production” to describe the activity of making, producing, creating or converting electric power from

specified sources, but does not provide guidance regarding the point at which

“generation or production” begins and ends. Guidance is defined in existing

regulation section 1525.4(b)(7) for the initiation and termination of manufacturing,

fabricating and other qualified activities. We recommend (b)(2) be amended to

provide comparable definitions as follows (underlined text denoting additions,

and strikethrough text denoting deletions):

(b)(2) “Generation or production” means the activity of making, producing,

creating, or converting electric power energy from sources other than a

conventional power source, as defined in section 2805 of the Public

Utilities Code, beginning at the point at which fuel, feedstock, energy, or

an energy-carrying medium is received by the generation or production

process or facility, through the facility’s generator step-up transformers

and ending at the point at which electricity is capable of being fed into the

electric grid. Section 2805 defines conventional power source as power

derived from nuclear energy or the operation of a hydropower facility

greater than 30 megawatts or the combustion of fossil fuels, unless

cogeneration technology, as defined in section 25134 of the Public

Resources Code, is employed in the production of such power.

2. Participants of the April 11 interested parties meeting requested that the

proposed regulations provide more guidance relative to “storage and distribution” and “transmission” to clarify qualification for the exemption. The definitions that

were written into law by AB 398 and AB 131 were predicated on terminologies

referenced and activities regulated by both the California Public Utilities

Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).

Consistent with the qualification factors that are intended by the Legislature and

contemplated in the statutes to promote renewable energy, we recommend that

the following language be added to (b)(14):

(14) “Storage and distribution” means storing or distributing through the

electric grid, but not transmission of, electric power energy to consumers

regardless of source. For purposes of this section:

(A) Storage is defined as the capture, by any means, of energy that is

produced at one time so that it is available at a later time. This includes,

but is not limited to, the capture of energy using mechanical,



electromechanical, chemical, electrical, or thermal systems1. Examples of

these systems, without limitation, include pumped hydropower, flywheels,

compressed air, liquid air, batteries, hydrogen production, capacitors,

superconducting magnetic coils, and thermal capture systems.

(B) Distribution is defined as the carrying or delivery of electric energy at

less than 69 kilovolts2, or the carrying or delivery of electric energy that is

subject to regulation by the California Public Utilities Commission.

(C) Transmission is defined as the carrying or delivery of electric energy

other than distribution.

3. Existing regulations describe and provide examples of qualified tangible personal

property for use in qualified activities. To provide parity and improve clarity, we

recommend that descriptions and examples be prescribed for equipment used in

the generation or production, and storage or distribution of electric energy, by

adding three new sections (b)(10)(A)(4), (b)(10)(A)(5) and (b)(10)(A)(6) as

follows:

(b)(10)(A)(4)

4. With respect to generation or production of electricity, qualified tangible

personal property includes, but is not limited to, all of the equipment and

structures necessary to receive fuel, feedstock, energy, or a medium that

carries energy in any form, store it, process it, and convert it to electricity

that is capable of being fed into the electric grid, including cleaning,

exhausting, releasing or storing any waste products. Qualified tangible

personal property also includes all equipment necessary to operate,

control, regulate, maintain or monitor the operation of this equipment,

including safety systems. These types of qualified tangible personal

properties may be present in multiple qualifying generation and production

technologies, and qualification is not limited to the most common use.

a. Examples of qualified tangible personal property include, but are not

limited to the following, when used as part of a generation or production

process or facility:

-fuel or feedstock receipt and storage, dedicated fuel or feedstock

conveyance systems between the storage facility and the generation or

production facility, foundations, support frames and racks, all equipment

1 Definitions are based on Public Utilities Code Section 2835, with modifications to apply to electric energy. 2 69 kilovolts is the bright line test used by the California Public Utilities Commission and the Federal Energy Regulatory Commission to differentiate between intrastate distribution and interstate transmission of electric energy. CPUC regulates intrastate distribution of electric energy at less than 69 kilovolts, while FERC regulates interstate transmission of electric energy at 69 kilovolts or higher. Additionally, IRC Section 168(e)(3)(E)(v) also differentiates depreciation of utilities assets based on 69 kilovolts.



that converts the fuel or feedstock into electric energy, inverters, and all

equipment that carries electricity to the point of interconnection with the

electric grid, including wires, switchgear and transformers;

-engines, turbines, generators and equipment housings;

-heat recovery steam generators, steam turbines, steam generators,

condensers, cooling towers and water treatment equipment;

-towers and blades;

-solar collection equipment, including photovoltaic panels, concentrating

mirrors and lenses, trackers, plumbing and storage systems for a heat

transfer medium, and heat exchangers;

-pipes, plumbing and equipment necessary to extract and transfer

geothermal energy to a qualified generation or production facility;

-materials for dams and water conveyance systems, penstocks and

equipment necessary to control the flow of water;

-hydrogen electrolysis and storage equipment;

-equipment necessary to convert hydrokinetic energy into electricity; and

-biomass and biogas collection, gasification, pyrolysis, and torrefaction

equipment.

(b)(10)(A)(5)

5. Property primarily used in the storage of electric power is qualified

tangible personal property w hether connected to an electric distribution

system or an electric transmission system. Property used primarily for the

storage of electricity includes all equipment, components and materials

used for construction or assembly of systems that receive electric energy,

convert it to another form through which such energy can be stored, store

and maintain such energy, and convert it into electricity that is capable of

being fed into the electric grid, including wires, inverters, switchgear, and

transformers. The efficiency factor of a storage facility is not relevant in

determining whether the equipment, components and materials constitute

qualifying tangible personal property.

(b)(10)(A)(6)

6. Property used primarily for distribution of electric energy is qualified

tangible personal property, provided it is used in the distribution of

electricity as defined in (b)(14)(B).



a. Examples include, but are not limited to:

-fully dressed towers and poles, conductor, conduit and insulators;

-equipment that changes or regulates voltage, such as transformers or

regulators;

-equipment that protects the distribution system, such as fuses, reclosers

and circuit breakers; and

-equipment that monitors or controls the distribution system, such as

measuring devices, switches and Supervisory Control and Data

Acquisition (SCADA) devices and controls.

4. Existing regulations (c)(1) allow purchasers to pay the full amount of the

sales/use tax at the time of purchase and to submit an exemption certificate at a

later date. This provision was explicitly included in the regulations to address

situations in which eligibility is unclear at the time of purchase, due to factors

such as: the total qualified purchases for the unitary group relative to the $200

million annual cap; the eligible equipment versus ineligible equipment that is

combined in a mass purchase order; the cost accounting for the equipment

relative to different cost centers; etc.

However, the regulations also reference “timely” submittal of an exemption certificate, and states that “A certificate will be considered timely if it is taken any time before the seller bills the purchaser for the property, any time within the

seller’s normal billing or payment cycle, or any time at or prior to delivery of the property to the purchaser.”

The interaction of these two provisions and their interpretation have been

confusing and inconsistent among retailers CDTFA field offices, and have

resulted in rejection of refund claims, which subsequently were reversed by

CDTFA supervisors in the field offices.

As eligibility may not be determined until well after the property has been

delivered to the purchaser, due to factors discussed above, we recommend

clarifying amendments to allow purchasers to submit an exemption certificate at

any time prior to the tolling of the statute of limitations pursuant to section 6902 of

the Revenue and Taxation Code. We recommend adding language to (c)(1), as

follows:

A certificate will be considered timely if it is taken any time before the

seller bills the purchaser for the property, any time within the seller’s

normal billing or payment cycle, or any time at or prior to delivery of the

property to the purchaser, or any time prior to the expiration of periods for



filing a claim for refund, pursuant to section 6902 of the Revenue and

Taxation Code.

For obvious reasons, the purchaser is motivated to submit an exemption

certificate as early as possible, however, this amendment helps ensures that

qualified exemptions are not unduly rejected and improves parity for refund

claims of sales taxes versus use taxes.

5. AB 398 and AB 131 expanded the definition of “useful life” to include tangible

personal property that is deducted under various sections of the Revenue and

Taxation Code, in recognition that numerous equipment that is otherwise eligible

for the partial exemption is deemed ineligible because it was deducted for state

income/franchise tax purposes.

As this definition has been of significant confusion for taxpayers, we recommend

language be added to (b)(15) to clarify that tangible personal property that is

depreciated over a period of one or more years or capitalized for

income/franchise tax purposes, and tangible personal property that is deducted

pursuant to specified state and federal provisions are deemed to have a useful

life of more than one year; and to reflect statutory intent that eligibility for

specified deducted equipment is retroactively effective beginning July 1, 2014,

when the program was first implemented;

(15) “Useful life.” (A) On and after July 1, 2014, Ttangible personal property that

the qualified person treats 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 regulation if the qualified person treats it as

having a useful life of one or more years, including but not limited to, deducting or

expensing the tangible personal property under sections 17201 and 17255 or

section 24356 of the Revenue and Taxation Code, as those sections apply for

the taxable years in which the equipment was purchased.

(B) Tangible personal property that the qualified person treats 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 regulation.

For purposes of this paragraph, tangible personal property that is deducted under

sections 17201 and 17255 or section 24356 shall be deemed to have a useful life

of one or more years.

6. The exemption certificates included in Appendixes A and B require purchasers to

certify that they are primarily engaged in qualified activities, such as “storing and distributing electric power as described in Code 221122 of the NAICS”. Statutes

define storing and distributing to mean “storing or distributing through the electric



grid…”. For purposes of qualified activities relative to the NAICS, the exemption

certificate should be changed to replace all references of “storage and distribution” and “storing and distributing” with “storage or distribution” and “storing or distributing”, respectively.

enclosed is the discussion paper ... - cdtfa.ca.gov · 450 n street, sacramento, ca 95814 po box...

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