State & Local Taxes
On July 11, California Gov. Jerry Brown signed Assembly Bill 93 (A.B. 93), effectively eliminating the California Enterprise Zone (EZ) Tax Credit program and replacing it with a more limited hiring credit. Despite the negative impact of the EZ program’s repeal, A.B. 93 also introduces numerous favorable sales/use tax exemptions that benefit manufacturers and biotechnology firms.
Demise of the California EZ Tax Credit Program
Under A.B. 93, effective Jan. 1, 2014, the EZ program will be replaced with a hiring credit with significant limitations (the New Hiring Credit), including stricter qualification requirements, such as:
- Demonstrating a net increase in new employees;
- Qualified wages must be between $12 and $28 per hour, which is between 150% and 350% of California’s minimum wage; and
- Only full-time employees will be
considered for the hiring credit, and they must
qualify under one of the following four criteria:
- Unemployed/displaced worker;
- U.S. military veteran;
- Ex-offender; or
- Recipient of the federal earned income tax credit.
The new hiring credit can only be claimed on a timely filed, original return, and it is awarded competitively from a limited amount of funds each fiscal year set by the newly created California Competes Tax Credit Committee, which will be responsible for establishing limits on the aggregate amount of credits available to taxpayers. Businesses that want to claim these credits must request a “tentative credit reservation” with the Franchise Tax Board within 30 days of the employee’s date of hire, and they must submit an annual “certification of employment” for each full-time employee to remain eligible for the credit during the 60-month credit period. The credit is available for businesses in designated census tracts or former enterprise zones only.
Businesses will also be subject to credit recapture upon the termination of a qualified employee within 36 months from the date of hire, absent a statutorily enumerated exception (e.g., voluntary separation of employee, disability, and terminations for cause, among other, less common scenarios).
Qualified employees hired on or before Dec. 31, 2013, for whom the businesses obtain the required credit vouchering, will continue to generate hiring credits under the existing rules. However, the carryover periods for the EZ hiring credits will be limited to 10 years, as opposed to indefinitely under the original rules.
The new law also eliminates the sales and use tax component of the existing EZ program for sales taxes paid on qualified asset purchases on or after Jan. 1, 2014.
Rebirth of the California Manufacturing and Biotechnology Partial Exemption
Until Dec. 31, 2003, California provided a partial exemption from state (but not local) sales and use taxes on the purchase of certain tangible personal property by new businesses engaged in a qualified line of business. The nearly 10-year absence of a sales and use tax manufacturing exemption has placed California businesses at a considerable disadvantage vis-à-vis businesses in other states. A.B. 93 reintroduces a broadly targeted partial exemption from state (but not local) sales and use taxes for manufacturers and biotechnology firms. The sales and use tax exemption applies to qualified asset purchases made on or after July 1, 2014, through Jan. 1, 2019 (July 1, 2021, for certain businesses located in specifically designated economic development areas determined on an annual basis). The partial exemption from the 4.1875% state portion of the sales/use tax applies to the following:
- Qualified tangible personal property purchased for use by manufacturers and other qualified persons 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;
- Qualified tangible personal property to be used by qualified persons primarily in research and development; and
- Qualified tangible personal property purchased for use by a qualified person for use primarily to maintain, repair, measure, or test any of the above-described qualified tangible personal property.
“Qualified tangible personal property” includes, but is not limited to, the following:
- 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, and computer software, together with all repair and replacement parts with a useful life of one or more years, 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;
- Tangible personal property used in pollution control that meets state or local standards; and
- 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 qualified tangible personal property.
“Qualified tangible personal property” does not include the following:
- Consumables with a useful life of less than one year;
- 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; or
- Tangible personal property used primarily in administration, general management, or marketing.
“Qualified persons” are those primarily engaged (i.e., 50% or more of the time) in those lines of business described in North American Industry Classification System (NAICS) Codes 3111 to 3399 (all Manufacturing) or NAICS codes 541711 and 541712 (Research and Development in Biotechnology or Research and Development in the Physical, Engineering, and Life Sciences). “Research and development” means those activities that are described in Sec. 174 or in any regulations thereunder. However, a qualified person does not include anyone engaged in a business involving extractive or agricultural activities, savings and loan activities, or banking and financial activities that is required to use the equally weighted three-factor formula.
The California State Board of Equalization is expected to issue regulations before the July 1, 2014, effective date to clarify rules and provide guidance with respect to the format of the new exemption certificates required to document the new exemptions.
Mark Cook is a partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600, ext. 2143, or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.