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AB-303 Sales and use taxes: exemption: manufacturing: research and development.(2011-2012)

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AB303:v98#DOCUMENT

Amended  IN  Assembly  May 24, 2011

CALIFORNIA LEGISLATURE— 2011–2012 REGULAR SESSION

Assembly Bill
No. 303


Introduced  by Knight Assembly Member Knight, Perea
(Coauthor(s): Assembly Member Olsen)

February 09, 2011


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 303, as amended, Knight. Sales and use taxes: exemption: business equipment. manufacturing: 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.
This bill would, until January 1, 2017, exempt from a specified portion of those taxes the gross receipts from the sale of, and the storage, use, or other consumption in this state, of tangible personal property, purchased for use by a qualified person, primarily in manufacturing or other processes, as specified, or in research and development, and for use by a contractor purchasing that property for use in a construction contract, 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 in these laws.
This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes.

This bill would take effect immediately as a tax levy.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

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


SECTION 1.

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

6377.
 (a) (1) 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 any 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 the 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 property described in paragraph (1) or (2).
(D) Tangible personal property purchased for use by a contractor purchasing that property for use in the performance of a construction contract for the qualified person, who will use the property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with the manufacturing process.
(2) The exemption described in paragraph (1) shall not apply to the gross receipts from the sale of or the storage, use, or other consumption of tangible personal property that is used primarily in administration, general management, or marketing.
(b) For purposes of this section:
(1) “Fabricating” means to make, build, create, produce, or assemble components or property to work in a new or different manner.
(2) “Manufacturing” means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, or character of the property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property.
(3) “Primarily” means 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 taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer 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 taxpayer’s manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer’s manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5) “Processing” means the physical application of the materials and labor necessary to modify or change the characteristics of property.
(6) “Qualified person” means any person that is both of the following:
(A) A new trade or business. In determining whether a trade or business activity qualifies as a new trade or business, the following rules shall apply:
(i) In any case where a person purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by that person (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by that person (or any related person) in the conduct of his or her trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the person (or any related person). For purposes of this subparagraph only, the following rules shall apply:
(I) The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the month following the quarterly period in which the person (or any related person) first uses any of the acquired trade or business assets in his or her business activity.
(II) Any acquired assets that constituted property described in Section 1221(a) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a) of the Internal Revenue Code in the hands of the acquiring person (or related person).
(ii) In any case where a person (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (“prior trade or business activity”), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget, 2007 edition, than are any of the person’s (or any related person’s) current or prior trade or business activities in this state.
(iii) In any case where a person, including all related persons, is engaged in trade or business activities wholly outside of this state and that person first commences doing business in this state (within the meaning of Section 23101) after the effective date of this section (other than by purchase or other acquisition described in clause (i)), the trade or business activity shall be treated as a new business.
(iv) In any case where the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the person as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of clause (i).
(v) “Related person” means any person that is related to that person under either Section 267 or 318 of the Internal Revenue Code.
(vi) “Acquire” includes any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(B) Engaged A person primarily engaged in those lines of business described in Codes 31 to 33, inclusive, of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget, 2007 edition.
(7) Notwithstanding paragraph (6), “qualified person” shall not include any person who has conducted business activities in a new trade or business for three or more years.
(8) “Refining” means the process of converting a natural resource to an intermediate or finished product.
(9) “Research and development” means those activities that are described in Section 174 of the Internal Revenue Code or in any regulations thereunder.
(10) “Tangible personal property” does not include any of the following:
(A) Consumables with a normal useful life of less than one year, except as provided in subparagraph (E) of paragraph (10) (11).
(B) Furniture, inventory, equipment used in the extraction process, or equipment used to store finished products that have completed the manufacturing process.
(11) “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 taxpayer or another party.
(C) 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) Fuels used or consumed in the manufacturing process.
(F) Property used in recycling.
(12) “Useful life” for tangible personal property that is treated as having a useful life of one or more years for state income or franchise tax purposes shall be deemed to have a useful life of one or more years for purposes of this section. “Useful life” for tangible personal property that is treated as having a useful life of less than one year for state income or franchise tax purposes shall be deemed to have a useful life of less than one year for purposes of this section.
(c) No exemption shall be allowed under this section unless the purchaser furnishes the retailer with an exemption certificate, completed in accordance with any instructions or regulations as the board may prescribe, and the retailer subsequently furnishes the board with a copy of the exemption certificate. The exemption certificate shall contain the sales price of the tangible personal property.
(d) Notwithstanding any provision of the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) or the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)), the exemption established by this section shall not apply with respect to any tax levied by a county, city, or district pursuant to, or in accordance with, either of those laws.
(e) (1) Notwithstanding subdivision (a), the exemption provided by this section shall not apply to any sale or use of property 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.
(2) Notwithstanding subdivision (a), the exemption established by this section shall not apply with respect to any tax levied pursuant to Sections 6051.2, 6051.5, 6201.2, and 6201.5, or pursuant to Section 35 of Article XIII of the California Constitution.
(f) If a purchaser certifies in writing to the seller that the property purchased without payment of the tax will be used in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax, and within one year from the date of purchase, the purchaser (1) removes that property outside California, (2) converts that property for use in a manner not qualifying for the exemption, or (3) uses that property in a manner not qualifying for the exemption, the purchaser shall be liable for payment of sales tax, with applicable interest, as if the purchaser were a retailer making a retail sale of the property at the time the property is so removed, converted, or used, and the sales price of the property to the purchaser shall be deemed the gross receipts from that retail sale.
(g) This section shall apply to leases of tangible personal property classified as “continuing sales” and “continuing purchases” in accordance with Sections 6006.1 and 6010.1. The exemption established by this section shall apply to the rentals payable pursuant to such a lease, provided the lessee is a qualified person and the property is used in an activity described in subdivision (a). Rentals that meet the foregoing requirements are eligible for the exemption for a period of six years from the date of commencement of the lease. At the close of the six-year period from the date of commencement of the lease, lease receipts are subject to tax without exemption.
(h) This section shall cease to be operative on January 1, 2017, and as of that date is repealed.

SEC. 2.

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

SEC. 2.

 This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect. However, the provisions of this act shall become operative on the first day of the first calendar quarter commencing more than 90 days after the effective date of this act.