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AB-1972 Sales and use taxes: exemption: manufacturing equipment: research and development. (2011-2012)

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CALIFORNIA LEGISLATURE— 2011–2012 REGULAR SESSION

Assembly Bill
No. 1972


Introduced  by  Assembly Member Huber

February 23, 2012


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


LEGISLATIVE COUNSEL'S DIGEST


AB 1972, as introduced, Huber. Sales and use taxes: exemption: manufacturing equipment: research and development.
The Sales and Use Tax Law imposes a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. That law provides various exemptions from those taxes.
On and after January 1, 2013, and before January 1, 2019, this bill would exempt from those taxes the sale of, and the storage, use, or other consumption in this state of, tangible personal property, as defined, purchased for use by a qualified person, as defined, primarily in any stage of manufacturing, processing, refining, fabricating, or recycling of tangible personal property; in research and development; to maintain, repair, measure, or test specified tangible personal property; and by a contractor for use in a construction contract with a qualified person, as specified.
The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.
Section 2230 of the Revenue and Taxation Code provides that the state will reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.
This bill would provide that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse local agencies for sales and use tax revenues lost by them pursuant to this bill.
This bill would take effect immediately as a tax levy.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: YES  

The people of the State of California do enact as follows:


SECTION 1.

 Section 6377 is added to the Revenue and Taxation Code, to read:

6377.
 (a) (1) On and after January 1, 2013, there are exempted from the taxes imposed by this part the gross receipts from the sale of, and the storage, use, or other consumption in this state of, all of the following:
(A) 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 property to its completed form, including packaging, if required.
(B) Tangible personal property purchased for use by a qualified person to be used primarily in research and development.
(C) Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any tangible personal property described in subparagraph (A) or (B).
(D) Tangible personal property purchased by a contractor for use in the performance of a construction contract for a qualified person that will use the tangible personal 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 the manufacturing process.
(2) The exemption established by this section shall not apply to the gross receipts from the sale of, or the storage, use, or other consumption of, any of the following:
(A) Tangible personal property that is used primarily in administration, general management, or marketing.
(B) Consumables with a useful life of less than one year.
(C) Furniture or inventory or equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing process.
(b) For purposes of this section:
(1) “Fabricating” means to make, build, create, produce, or assemble components or property to work in a new or different manner.
(2) “Manufacturing” means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the tangible personal 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 tangible personal property. Manufacturing includes the generation of electricity.
(3) “Primarily” means 50 percent or more of the time. For purposes of subdivision (a), “primarily” means tangible personal property used 50 percent or more of the time in an activity described in subdivision (a).
(4) “Process” means the period beginning at the point at which any raw materials are received by the qualified person and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form, including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified person’s manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified person’s manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5) “Processing” means the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property.
(6) “Qualified person” means either of the following:
(A) A person who is primarily engaged in those lines of business classified in Industry Groups 3111 to 3399, inclusive, Industry Group 5112, NAICS Industry 221119, or NAICS Industry 541711 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2007 edition.
(B) An affiliate of a person described in subparagraph (A) provided that the affiliate is a member of the qualified person’s unitary group for which a combined report is required to be filed under Article 1 (commencing with Section 25101) of Chapter 17 of Part 11.
(7) “Refining” means the process of converting a natural resource to an intermediate or finished product.
(8) “Research and development” means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(9) “Tangible personal property” includes, but is not limited to, all of the following:
(A) Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures.
(B) All equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, without limitation, computers, data processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years 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 person.
(C) 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.
(D) Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, or fabricating process, or that constitute a research or storage facility used during the manufacturing process. Buildings used solely for warehousing purposes after completion of the manufacturing process are not included.
(E) Tangible personal property used in recycling.
(c) An exemption shall not be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer retains the exemption certificate in its records. The exemption certificate shall contain the sales price of the tangible personal property, the sale of, or the storage, use, or other consumption of which is exempt pursuant to subdivision (a) and shall be furnished to the board upon request.
(d) Notwithstanding subdivision (a), the exemption provided by this section shall not apply to any sale or use of tangible personal property which, within one year from the date of purchase, is either removed from California or converted from an exempt use under subdivision (a) to some other use not qualifying for the exemption or used in a manner not qualifying for exemption.
(e) 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 pursuant to this section, and within one year from the date of purchase, the purchaser (1) removes that tangible personal property outside California, (2) converts that tangible personal property for use in a manner not qualifying for the exemption, or (3) uses that tangible personal 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 removed, converted, or used, and the sales price of the tangible personal property to the purchaser shall be deemed the gross receipts from that retail sale.
(f) The exemption established by this section shall apply to a lease of tangible personal property classified as a “continuing sale” or “continuing purchase” in accordance with Section 6006.1 or 6010.1, and to the rentals payable pursuant to such a lease, provided the lessee is a qualified person and the tangible personal property is used in an activity described in subdivision (a).
(g) At the time necessary information technologies and electronic data warehousing capabilities of the board are sufficiently established, the board shall determine an efficient means by which qualified persons may electronically apply for, and receive, an exemption certificate that contains information that would assist them in complying with this part with respect to the exemption established by this section.
(h) This section shall remain in effect only until January 1, 2019, and as of that date is repealed.

SEC. 2.

 Notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made by this act and the state shall not reimburse any local agency for any sales and use tax revenues lost by it under this act.

SEC. 3.

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