California's partial exemption for R&D and manufacturing — the 3.9375% rate

California’s manufacturing partial exemption is one of the most valuable state incentives for manufacturers and R&D operations, reducing the effective tax rate on equipment purchases by nearly 4 points.

Key takeaways

• What it covers: tangible personal property (machinery, equipment, components, computer equipment) used primarily in qualifying manufacturing or R&D activities; also covers certain property used in agricultural processing
• The exemption amount: approximately 3.9375% of the purchase price is exempt: this is the state sales tax rate component; local and district taxes (ranging from 0.75%–3.25% depending on location) remain due
• Net effective rate: instead of California’s full combined rate (up to 10.25% in some areas), qualifying purchases are taxed at the local/district-only rate (roughly 1%–3.25%)
• Qualifying buyers: businesses with NAICS codes in the manufacturing sector (3111-3399); certain agricultural businesses; businesses conducting R&D qualifying under IRC §41
• Qualifying property test: property must be used more than 50% of the time in qualifying manufacturing or R&D activity; equipment used partially in qualifying activities and partially in other activities doesn’t qualify unless the primary use test is met
• Certificate required: the buyer must provide a valid partial exemption certificate (CDTFA-230-M or equivalent) to the seller at the time of purchase; sellers who accept the certificate in good faith are relieved of liability if the buyer misrepresents qualification
• Use tax applies: the partial exemption applies to both sales tax and use tax; if a qualifying business purchases equipment from an out-of-state seller without tax, they still qualify for the partial exemption when self-assessing use tax
• Sellers’ obligation: when a buyer presents a valid partial exemption certificate, charge only the local/district rate, not the full combined rate