CONSTRUCTION AND BUILDING CONTRACTORS
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JULY 2024
Lumber and engineered wood products
When you make out-of-state purchases of lumber products or engineered wood products for use in this state or from
retailers who do not register to collect the Lumber Products Assessment, you must register with us to report and pay
the assessment directly.
Manufacturing and research & development partial exemption
Revenue and Taxation Code section 6377.1 and Regulation 1525.4, Manufacturing and Research & Development
Equipment, provide a partial exemption from tax for certain sales, leases, or purchases of qualified tangible personal
property purchased for use by a qualified person and used in a qualified manner. A qualified person means a person
primarily engaged in those lines of business described in codes 3111 to 3399, inclusive, 221111 to 221118, inclusive,
221122, 541711, or 54712 of the North American Industry Classification System (NAICS) published by the United States
Office of Management and Budget (OMB), 2012 edition.
For purposes of this partial exemption, qualified tangible personal property includes, but is not limited to:
• Machinery and equipment, including component parts and contrivances such as belts, shafts, or moving
parts, and operating structures,
• Equipment or devices used or required to operate, control, regulate, or maintain qualified machinery or
equipment, including computers, data processing equipment, and computer software with a useful life of
one or more years,
• Tangible personal property used in pollution control that meets or exceeds standards established by this
state or any governmental agency within this state,
• Special purpose buildings and foundations used as an integral part of the manufacturing, processing,
refining, fabricating or recycling process, including research or storage facilities utilized during those
processes. Buildings solely used for warehousing purposes before or after these processes are excluded,
• Beginning January 1, 2018, Assembly Bill (AB) 398 (Chapter 135, Stats. 2017) expands the partial exemption
to include 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 as described in NAICS codes
22111 to 221118, inclusive, or 221122. Qualified tangible personal property has also been expanded to
include special purpose buildings and foundations used as an integral part of the generation or production
or storage and distribution of electric power, and
• Beginning January 1, 2018, AB 398 also removes the exclusion from the definition of a “qualified person” for
certain persons engaged in agricultural business activities previously excluded as an apportioning trade or
business under RTC section 25128.
If a construction contractor is hired by a manufacturer to build a special purpose building, their sales or purchases of
materials or fixtures that they furnish and install in the performance of a construction contract for a qualified person
may qualify for the partial exemption. The contractor should obtain a partial exemption certificate from the qualified
person. 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 must timely furnish the retailer with a partial exemption certificate
in order for the partial exemption to be allowed.
This partial exemption may be utilized by both prime contractors and subcontractors, provided the requirements of
the partial exemption are met.
The partial exemption rate is currently 3.9375 percent. The partial exemption provides that sales of the qualifying
property sold to a qualified person be taxed at a rate of 3.3125 percent (7.25 percent current statewide tax rate –
3.9375 percent partial exemption) plus any applicable district taxes.