Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2011
 

Sales And Use Tax Regulations

Article 3. Manufacturers, Producers, Processors

Sales And Use Tax Regulations

Article 3. Manufacturers, Producers, Processors

Regulation 1524. Manufacturers of Personal Property.

Reference: Sections 6011, 6012, and 6018.6, Revenue and Taxation Code.

Bad Debts, see Regulation 1642.

Tax Paid Purchases Resold, see Regulation 1701.

(a) IN GENERAL. Tax applies to the gross receipts from retail sales (i.e., sales to consumers) by manufacturers, producers, processors, and fabricators of tangible personal property the sale of which is not otherwise exempted. The measure of the tax is the gross receipts of, or sales price charged by, the manufacturer, producer, processor, or fabricator, from which no deduction may be taken on account of the cost of the raw materials or other components purchased, or labor or service costs to create or produce the tangible personal property, or of any step in the manufacturing, producing, processing, or fabricating, including work performed to fit the customer's specific requirements, whether or not performed at the customer's specific request, or any other services that are a part of the sale. In addition, no deduction may be taken on account of interest paid, losses, or any other expense.

(b) PARTICULAR APPLICATIONS.

(1) ALTERATIONS OF NEW AND USED ITEMS.

(A) Alteration of New Items means and includes any work performed upon new items such as garments, bedding, draperies, or other personal and household items to meet the requirements of the customer, whether the work involves the addition of material to the item, the removal of material from the item, the rearranging or restyling of the item, or otherwise altering the item, when such alterations result in the creation or production of a new item or constitute a step in the creation or production of a new item for the customer.

Charges for the alteration of new items are subject to tax, except as provided in subdivision (c)(4) of Regulation 1506, regardless of whether the charges for the alterations are separately stated or included in the price of the item, or whether the alterations are performed by the seller of the item or by another person. Persons engaged in the producing, processing or fabricating of new items are retailers, not consumers, of the alterations provided to the customer and are required to hold a seller's permit.

(B) Alteration of Used Items means and includes the mending, shortening or lengthening, taking in or letting out, or otherwise altering used items such as garments, bedding, draperies, or other personal and household items when such alterations merely refit or repair the item for the use for which it was created or produced.

Charges for the alteration of used items are not subject to tax. Generally, persons performing the alteration of used items are consumers, not retailers, of the supplies and materials furnished in connection with the alterations, and tax applies to the sale of the supplies and materials to such persons.

Except as provided in subdivision (c)(4) of Regulation 1506, persons performing the alteration of used items are retailers, not consumers, of the supplies and materials furnished in connection with the alterations when the retail value of the supplies and materials is more than 10 percent of the total charge for the alterations, or if the invoice to the customer includes a separate charge for such property. When such persons are retailers, not consumers, tax applies to the fair retail selling price of the supplies and materials to the customer.

When the retail value of the supplies and materials is more than 10 percent of the total charge to the customer, the person performing the alterations must segregate on the invoice to the customer and in its records, the fair retail selling price of the supplies and materials from the charge for the alterations. "Total charge" means the combined total of the retail value of the supplies and materials furnished or consumed as part of the alterations and the labor charges for the alterations.

(2) PAINTING, POLISHING, FINISHING. Tax applies to charges for painting, polishing, and otherwise finishing tangible personal property in connection with the production of a finished product for consumers, whether the article to be finished is supplied by the customer or by the finisher. Tax does not apply to charges for painting or finishing real property.

History: Effective July 1, 1939.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended and renumbered August 4, 1970, effective September 5, 1970.

Amended April 8, 1987, effective August 8, 1987. In subdivision (b)(1)(2), added reference to application of tax to persons who operate clothes cleaning or clothes dyeing establishments.

Amended December 17, 2008, effective April 10, 2009. Amended subdivision (a) to include producers, processors, and fabricators of tangible personal property with manufacturers. Amended subdivision (b)(1) to clarify how tax applies to charges for alterations of new or used items. Deleted subdivision (b)(2) and renumbered former subdivision (b)(3) accordingly.


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Regulation 1525. Property Used in Manufacturing.

Reference: Sections 6007–6009.1, Revenue and Taxation Code.

(a) Tax applies to the sale of tangible personal property to persons who purchase it for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the manufactured article to be sold. Examples of such property are machinery, tools, furniture, office equipment, and chemicals used as catalysts or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.

(b) Tax does not apply to sales of tangible personal property to persons who purchase it for the purpose of incorporating it into the manufactured article to be sold, as, for example, any raw material becoming an ingredient or component part of the manufactured article.

(c) PARTICULAR APPLICATION OF NEW OAK WINE BARRELS. Tax does not apply to sales of new, used, or re-coopered oak barrels to persons who purchase the barrels for the purpose of physically incorporating oak into wine to be sold. Re-coopered barrels have the inner surface shaved off to expose new wood. The use of oak wine barrels as a container during the manufacturing process is incidental to the primary purpose of incorporating oak into the wine.

(d) PARTICULAR APPLICATION OF BRANDY BARRELS. Tax does not apply to sales of new or used oak barrels to persons who purchase the barrels for the purpose of physically incorporating oak into brandy to be sold. The use of the barrels as containers during the manufacturing process is incidental to the primary purpose of incorporating oak into the brandy.

History: Effective August 1, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended by renumbering November 3, 1971, effective December 3, 1971.

Amended January 10, 1996, effective April 3, 1996. Added subdivision (c).

Amended October 8, 1997, effective April 4, 1998. Subdivision (d) added.

Amended January 6, 1999, effective May 1, 1999. Subdivision (c) is amended as follows: phrase ", used, or re-coopered" added to first sentence; new second sentence added; word "new" deleted from former second, now the third, sentence.


Sales Tax General Bulletin 50–24; July 10, 1950.

Subject: REGULATION 1525, PROPERTY USED IN MANUFACTURING, AND REGULATION 1541, PRINTING AND RELATED ARTS, AS APPLIED TO DIES, PATTERNS, JIGS, TOOLING, PHOTO ENGRAVINGS, AND OTHER MANUFACTURING AIDS.

When manufacturers purchase, or fabricate from raw materials purchased, dies, patterns, jigs, tooling, photo engravings, and other manufacturing or printing aids for the account of customers who acquire title to the property upon delivery thereof to, or upon the completion of the fabrication thereof by, the manufacturers, the manufacturers will be regarded as purchasing such property either as agent for, or for resale to, their customers. The tax will apply, accordingly, with respect either to the sale to the manufacturer as agent of his customer, or with respect to the sale by the manufacturer to the customer, and not also with respect to the sale to the manufacturer.

In determining whether the manufacturer or printer purchases the property on behalf of, or for resale to, his customer, the terms of the contract with the customer, the custom or usage of the trade and any other pertinent factors will be considered. For example, if the customer issues a purchase order for a pattern, die, or other tool, or on the purchase order for the goods itemizes or otherwise specifies the particular pattern, die, or tool which will be required by the manufacturer or printer to manufacture the goods desired by the customer, and the manufacturer obtains such tool pursuant to the customer's specific order, billing, itemizing, or otherwise identifying it to the customer separately from the billing for the article manufactured therefrom, and either delivers it to the customer or holds it as bailee for the customer, it will be presumed that the manufacturer acquired the property on behalf of the customer or for immediate resale to him.


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Regulation 1525.1. Manufacturing Aids.

Reference: Sections 6007-6009.1 and 6010.5, Revenue and Taxation Code.

Tax applies to the sale of manufacturing aids such as dies, patterns, jigs and tooling used in the manufacturing process notwithstanding the fact that the property used in manufacturing may subsequently be delivered to or held as property of the person to whom the manufactured product is sold. If the contract of sale between the manufacturer and the customer provides that title to the manufacturing aid passes to the purchaser prior to physical use of the property in the manufacturing process, then the manufacturing aid or its raw materials, if the manufacturing aid is fabricated by the manufacturer, may be purchased for resale. Tax then applies, unless otherwise exempt, to the sale of the manufacturing aid by the manufacturer to the customer, and not also with respect to the sale to the manufacturer. If the contract provides that title to the manufacturing aid passes to the customer in this state prior to use, then a retail sale subject to tax occurs in this state even though the manufacturing aid may subsequently be shipped to a point outside this state.

History: Adopted August 20, 1985, effective November 22, 1985. Added this new regulation to explain the application of the sales and use tax to the sale of manufacturing aids such as dies, patterns, jigs, and tooling used in manufacturing other items of tangible personal property.


BUSINESS TAXES GENERAL BULLETIN 61–2; JANUARY 16, 1961,
REVISED JUNE 9, 1967 AND JUNE 15, 1967.

Subject: REGULATION 1525, PROPERTY USED IN MANUFACTURING, AND REGULATION 1668, RESALE CERTIFICATES, AS APPLIED TO SALT USED IN FOOD PROCESSING.


(a) APPLICATION OF TAX.

(1) Section 6359 of the Sales and Use Tax Law exempts sales of "food products for human consumption", and provides that the term "food products" includes . . . "salt" . . .

Accordingly, the sale of salt for human consumption as such, or as a component part of other foods for human consumption, such as pickles and olives, is exempt from the tax.

(2) Sales of salt to manufacturers or processors of food products or other commodities are not exempt as sales for resale if the salt is purchased for any purpose other than resale as a component part of the manufactured article. Section 6007 defines a "retail sale" as "a sale for any purpose other than resale in the regular course of business in the form of tangible personal property". Thus, if salt is purchased by a manufacturer for use in the manufacturing process (other than incorporation into the manufactured product), the sale of the salt is not exempt, either as a food product for human consumption or as a sale for resale.

(A) Examples of use in the manufacturing process are:

1. As a brine for storing, curing, or pickling when the food product is withdrawn from the brine prior to sale, except that portion of the salt purchased which remains in the food product to be sold.

2. Cleaning and grading food products by means of a flotation process.

3. Water softening.

(B) Examples of incorporation into the manufactured product are:

1. The placing of salt in the containers in which food products are placed and sold.

2. The placing of salt in a brine to be placed in containers in which food products are placed and sold.

3. The placing in a brine of all of the salt intended to remain in the food product to be sold, notwithstanding the fact that a portion of the brine must be discarded because of impurities forming in the brine before all of the salt can be incorporated in the food product to be sold.

(b) RESALE CERTIFICATES.

(1) The law governing the use of resale certificates is set out in several sections of the Sales and Use Tax Law as follows:

"6091. For the purpose of the proper administration of this part and to prevent evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale unless he takes from the purchaser a certificate to the effect that the property is purchased for resale.

"6092. Effect of certificate. The certificate relieves the seller from liability for sales tax only if taken in good faith from a person who is engaged in the business of selling tangible personal property and who holds the permit provided for in Article 2 (commencing with Section 6066) of this chapter.

"6094. Liability of purchaser. If a purchaser who gives a certificate makes any use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the use shall be taxable to the purchaser under Chapter 3 (commencing with Section 6201) of this part as of the time the property is first used by him, and the sales price of the property to him shall be the measure of the tax.

"6094.5. Any person who gives a resale certificate for property which he knows at the time of purchase is not to be resold by him in the regular course of business for the purpose of evading payment to the seller of the amount of the tax applicable to the transaction is guilty of a misdemeanor."

(2) Resale certificates given by food processors and accepted by salt vendors must meet the requirements set forth in Regulation 1668. This is further explained by Form BT-741-A regarding "Resale Certificates—Their Use and Misuse" directed by the Secretary of the Board to all persons holding sellers' permits as of March 31, 1960. Inasmuch as a portion of the salt purchased by food processors is consumed and a portion is resold (see (a) (2) (A) and (a) (2) (B) above), the processors should determine by the best means possible the approximate percentage of all salt purchased that is resold and give resale certificates covering such percentage only. The percentage may vary with the type of salt sold, the type of food being processed, the processing methods used, and other factors. Studies have been made which indicate that when undried salt is sold to food processors who use the salt to make brine in which olives or pickles are processed, about 50% of the salt is resold with the olives or pickles and the remaining 50% is consumed by the food processors. Accordingly, it is in order for vendors of undried salt to accept resale certificates for 50% of each sale of undried salt to food processors who certify that the salt is to be used in making brine for processing olives or pickles for resale. Fifty percent of each such sale will be regarded as a taxable retail sale.

(3) Where a food processor is not a "seller" as defined by Section 6014 of the Sales and Use Tax Law and therefore is not required to hold a seller's permit, the food processor may nonetheless give a resale certificate in the same fashion as though he were a "seller". A statement substantially as follows may be entered on the resale certificate in lieu of a seller's permit number:

"Food processor selling only food products for human consumption."

(4) Inasmuch as the actual use of the salt purchased is within the specific knowledge of the manufacturer or processors rather than of the salt seller, purchasers holding sellers' permits may desire to follow the procedure authorized by Section 6012 of the Sales and Use Tax Law and Regulation 1701. Under this procedure, the purchasers of the salt would reimburse the salt vendors for tax on the total price of the salt. The purchasers would then deduct on their own tax returns the purchase price of the salt which is resold rather than used for some other purpose, a matter peculiarly within their knowledge rather than their vendors'. This procedure would give the purchasers an automatic credit for tax paid on purchases for resale, subject to audit of the purchasers, and the salt vendors would be relieved of any further responsibility.


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Regulation 1525.2. Manufacturing Equipment.

Reference: Section 6377, Revenue and Taxation Code.

(a) PARTIAL EXEMPTION FOR PROPERTY PURCHASED FOR USE IN THE MANUFACTURING PROCESS. Section 6377 of the Revenue and Taxation Code provides a partial exemption from sales and use tax for certain properties described in this regulation.

For the period commencing on January 1, 1994, and ending on December 31, 1994, the partial exemption applies to the taxes imposed by the state (6%), but does not apply to the taxes imposed by counties, cities, and districts pursuant to the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev.& Tax. Code §§ 7200, et seq.) or the Transactions and Use Tax Law (Rev.& Tax. Code §§ 7251, et seq.).

For the period commencing on January 1, 1995, and ending on December 31, 2000, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on December 31, 2003, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

Pursuant to the provisions of the Revenue and Taxation Code section 6377(g), the partial exemption from tax on the sale and use of property used in manufacturing and related activities as described in this regulation expired on December 31, 2003.

Subject to the limitations set forth above, this partial exemption applies to gross receipts from the sale, storage, use, or other consumption in this state of the following items:

(1) 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 property, beginning at the point that raw materials are received by the qualified person and introduced into the process and ending at the point at which the property has been altered to its completed form, including packaging, if required. For purposes of this regulation:

(A) Raw materials will 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 activities are conducted. Raw materials that are stored on premises other than where the qualified person's manufacturing activities are conducted, however, will not be considered to have been introduced into the process for purposes of this regulation.

(B) For purposes of this regulation, the term "packaging" includes only that packaging necessary to prepare the goods for delivery to and placement in the qualified person's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Any additional packaging, such as that packaging necessary to consolidate the goods prior to shipping or to protect them during transportation, shall not be considered to be "packaging" for purposes of this regulation.

(2) Tangible personal property purchased for use by a qualified person to be used primarily in research and development as defined in subdivision (c)(8).

(3) Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in subdivision (a)(1) or (a)(2).

(4) Tangible personal property purchased for use by a contractor purchasing that property either as an agent of a qualified person or for the contractor's own account and subsequent resale to a qualified person for use in the performance of a construction contract for the qualified person who 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.

(b) PROPERTY USED PRIMARILY IN ADMINISTRATION, GENERAL MANAGEMENT, OR MARKETING. Notwithstanding any other provision of this regulation, this partial exemption shall not apply to any tangible personal property that is used primarily in administration, general management, or marketing. For purposes of this subdivision:

(1) Tangible personal property is used primarily in administration, general management, or marketing when it is used 50 percent or more of the time in one or more of those activities.

(2) Tangible personal property used primarily to clean and maintain the factory floor of a manufacturing facility is used primarily in a stage of the manufacturing of property and is not used primarily in administration, general management, or marketing.

(3) Fire safety equipment that is tangible personal property and that is used primarily at and in connection with the factory floor of a manufacturing facility is used primarily in a stage of the manufacturing of property and is not used primarily in administration, general management, or marketing.

(c) DEFINITIONS. For purposes of this regulation:

(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 property by changing the form, composition, quality, or character of the property for ultimate sale at retail or for 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. For purposes of this regulation, "greater functionality" means that the tangible personal property has been improved so that it can perform new or different functions than the original property. Manufacturing includes logging, that is, the felling of timber, but does not include tree farming. Manufacturing does not include crop harvesting. Provided that the activity constitutes a "sale" as that term is used in subdivision (b) of section 6006 of the Revenue and Taxation Code, the tangible personal property need not be owned by the qualified person in order for the activity to qualify as manufacturing for purposes of this regulation.

(3) "Primarily" means that the tangible personal property is used 50 percent or more of the time in the designated activity or activities.

(4) "Process" means the period beginning at the point at which any raw materials are received by the qualified person and are 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, 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 materials and labor to modify or change the characteristics of property.

(6) "Qualified person" means any person that satisfies the requirements of both subdivisions (c)(6)(A) and (c)(6)(B) below with regard to the trade or business in which the property will be placed into service in the use qualifying the property for this partial exemption:

(A) A "qualified person" must have first commenced trade or business activities in a new trade or business in this state on or after January 1, 1994. For purposes of this subdivision, the term "activities" means trade or business activities. In determining whether or not a person is qualified within the meaning of this subdivision, the following rules apply:

1. The term "trade or business activities" does not mean the mere formation or organization of a corporation or other business entity that is intended to conduct a trade or business. Instead, a corporation or business entity first conducts activities when it first starts or commences the trade or business for which it was organized. The acquisition of operating assets that are necessary to the type of business contemplated, however, will constitute commencing activities. The term "operating assets" as used in this subdivision means assets that are in a state of readiness to be placed in service within a reasonable time period following their acquisition.

2. Notwithstanding any other provision of this subdivision, a person will not be considered to have first commenced activities in a new trade or business in this state on or after January 1, 1994, if, at any time within the 36 months preceding that date, that person, or any related person, was required to have secured a seller's permit under section 6066 of the Revenue and Taxation Code for that trade or business, or any other trade or business classified under the same division of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (the "Manual"). For purposes of this regulation, the term "division" means a division as that term is used in the Manual.

3. A trade or business is not a new trade or business in this state if, within the 36 months preceding the date that activities were first commenced in that trade or business in this state, either the person claiming the partial exemption, or any related person, had conducted any activities in this state in any trade or business classified under the same division of the Manual as that trade or business.

4. 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 (a "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 trade or business if the additional trade or business activity is classified under a different division of the Manual than are any of the person's (or any related person's) current or prior trade or business activities in this state within the preceding 36 months.

5. 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 of the Revenue and Taxation Code) after December 31, 1993 (other than by purchase or other acquisition described in subdivision (c)(6)(A)6.), the newly commenced trade or business activity in this state shall be treated as a new trade or business for purposes of this subdivision.

6. On or after January 1, 1995, notwithstanding anything else set forth in this subdivision, 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 the entity) that is doing business in this state (within the meaning of section 23101 of the Revenue and Taxation Code), the trade or business thereafter conducted by that person (or any related person) shall not be treated as a new trade or 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 person (or any related person) being used in the same trade or business both within and without this state. For purposes of this subdivision only:

a. 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.

b. Any acquired assets that constitute property described in section 1221(a)(1) 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)(1) of the Internal Revenue Code in the hands of the acquiring person (or any related person).

c. The trade or business conducted in this state by the acquiring person after the asset acquisition date shall be considered to be the same as an out-of-state trade or business conducted or previously conducted by the acquiring person (or any related person) only if the trade or business activities of both companies are or would be classified in the same division of the Manual.

d. An acquired trade or business will not be considered to have been acquired as an existing trade or business for purposes of this subdivision if it is acquired either: (1) from a liquidation sale of assets pursuant to a bankruptcy filed under Chapter 7 of the United States Bankruptcy Code; or (2) pursuant to a creditor's execution or foreclosure sale of a secured interest in the assets of the trade or business.

e. Example No.1: Corporation X is doing business wholly outside of this state in the trade or business of manufacturing automobiles. The total fair market value of the total assets of this trade or business is $100,000,000. Then, on or after January 1, 1994, Corporation X acquires all of the assets of an automobile manufacturing business in this state with a fair market value of $5,000,000 and immediately uses the acquired assets in its automobile manufacturing trade or business. Thereafter, between the date of acquisition and the last day of the month following the quarterly period during which the acquisition occurred, Corporation X acquires another $1,000,000 in assets for use in the automobile manufacturing business in this state. Under these assumed facts, the conditions set forth in this subparagraph will not serve to disqualify Corporation X from the partial exemption since the fair market value of the acquired assets does not exceed 20 percent ($5,000,000/$106,000,000) of the aggregate fair market value of the total assets of the trade or business being conducted by Corporation X; and neither Corporation X nor any related person had conducted any trade or business activities in this state within the preceding 36 months.

f. Example No. 2: Assume the same facts as in Example No. 1 above, but in this case, prior to acquiring the assets of the automobile manufacturing business in this state, Corporation X was solely and exclusively in the trade or business of providing data processing services. After the acquisition of the assets by Corporation X, however, the acquired assets will continue to be used in the automobile manufacturing business in this state. Assume further that no additional purchases are made after the date of acquisition. Under these assumed facts, since data processing services and automobile manufacturing are classified in different divisions of the Manual, the partial exemption will not be available to Corporation X because the fair market value of the acquired assets exceeds 20 percent ($5,000,000/$5,000,000) of the aggregate fair market value of the total assets held by Corporation X in the same trade or business.

7. 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. For purposes of this subdivision only:

a. Example No. 1: Corporation X is doing business in this state. One of its trade or business activities in this state is manufacturing automobiles. After January 1, 1994, for consideration, Corporation X transfers all of the assets used in the trade or business of manufacturing automobiles to a newly-formed, wholly-owned subsidiary known as Corporation Y. For purposes of applying this regulation, this transaction shall be treated as an acquisition of an existing trade or business by Corporation Y.

b. Example No. 2: Partnership A is a manufacturer doing business in this state. After January 1, 1994, for consideration, Partnership A transfers all of its assets to a newly-formed corporation known as Corporation B. Corporation B is owned by the partners of Partnership A in the same proportionate ownership interests as their respective ownership interests in the partnership. For purposes of applying this regulation, this transaction shall be treated as an acquisition of an existing trade or business by Corporation B.

8. For purposes of this subdivision, a person is a "related person" if that person is or previously was related to the qualified person within the meaning of either section 267 or 318 of the Internal Revenue Code.

9. The term "acquire" shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.

(B) A qualified person must be engaged in those manufacturing lines of business described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition. For purposes of this subdivision:

1. For purposes of classifying a line or lines of business, the economic unit shall be the "establishment" and the classification of the line or lines of business will be based on the establishment's single most predominant activity based upon value of production. The term "establishment" means an economic unit, generally at a single physical location, where business is conducted or where services or manufacturing or other industrial operations are performed. The following will generally constitute an "establishment": a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office.

2. For purposes of determining the "establishment" or "establishments" of a trade or business:

a. Where distinct and separate economic activities are performed at a single physical location, such as construction activities operated out of the same physical location as a lumber yard, each activity should be treated as a separate establishment where: (i) no one industry description in the classification includes such combined activities; (ii) the employment in each such economic activity is significant; and (iii) separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting. For purposes of this paragraph, whether or not employment in an economic activity is significant shall be based upon all of the facts and circumstances. Nevertheless, employment in an economic activity will be considered to be "significant" for purposes of this paragraph whenever more than 25 percent of the taxpayer's total number of employees at a single physical location, or more than 25 percent of the taxpayer's total dollar value of payroll at a single physical location, is attributable to the economic activity being tested for separate establishment status.

b. An establishment is not necessarily identical with the enterprise or company which may consist of one or more establishments. Also, an establishment is to be distinguished from subunits of the establishment such as departments.

c. Where a person conducts business at more than one establishment within the meaning of this subdivision, then that person shall be considered to be a "qualified person" for purposes of this regulation only as to those purchases that are intended to be used and are actually used in those lines of business that are described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.

(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" does not include any of the following:

(A) Real property, including tangible personal property to be incorporated into an improvement to real property, except for "special purpose buildings and foundations" as defined in subdivision (c)(10)(D) and conveyance systems and assembly lines as provided in subdivision (c)(10)(A).

(B) Consumables with a normal useful life of less than one year, except as provided in subdivision (c)(10)(E). For purposes of this regulation, it shall be presumed tangible personal property that the qualified person treats as having a normal useful life of less than one year for state income or franchise tax purposes is tangible personal property with a normal useful life of less than one year. This presumption may be rebutted by evidence satisfactory to the Board.

(C) Furniture, inventory, equipment used in the extraction process, equipment used to store raw materials that have not yet entered or commenced the manufacturing process, or equipment used to store finished products that have completed the manufacturing process. The extraction process includes such severance activities as mining, oil and gas extraction.

(D) Any property for which a credit is claimed under either section 17053.49 or 23649 of the Revenue and Taxation Code.

(10) "Tangible personal property" includes but is not limited to the following:

(A) Machinery and equipment within the meaning of subdivision (a)(6) of Regulation 1521 of the Sales and Use Tax Regulations, including component parts and contrivances such as belts, shafts, moving parts, and operating structures. The term also includes conveyance systems and assembly lines without regard to the manner of affixation to real property.

(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, including both operating programs and application programs, 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. Any repair and replacement parts that the qualified person treats as having a useful life of less than one year for state income or franchise tax purposes shall be presumed to have a useful life of less than one year for purposes of this regulation. This presumption may be rebutted by evidence satisfactory to the Board.

(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 that (i) are used as an integral part of the manufacturing, processing, refining, or fabricating process, or (ii) constitute a research facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity, or (iii) constitute a storage facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity. For purposes of this subdivision:

1. For purposes of this subdivision, "special purpose building and foundation" means only a building and the foundation immediately underlying the building that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the specified purposes as set forth in subdivision (a)(1) of this regulation (the qualified purpose).

2. A building is specifically designed and constructed or modified for a qualified purpose if it is not economic to design and construct the building for the intended purpose and then use the structure for a different purpose.

3. A building is used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use of a building for nonqualified purposes does not preclude the building from being a special purpose building. "Incidental use" means a use which is both related and subordinate to the qualified purpose. A use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualifying purpose.

4. In the event an entire building does not qualify as a special purpose building, a taxpayer may establish that a portion of a building, and the foundation immediately underlying the portion, qualifies for treatment as a special purpose building and foundation if the portion satisfies all of the definitional provisions in this subdivision.

5. Buildings and foundations that do not meet the definition of a special purpose building and foundation set forth above include, but are not limited to, buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building; research facilities that are used primarily prior to or after, or prior to and after, the manufacturing process; or storage facilities that are used primarily prior to or after, or prior to and after, completion of the manufacturing process.

6. For purposes of this subdivision, the term "integral part" means that the special purpose building or foundation (i) is used directly in the activity qualifying for the partial exemption from sales and use tax and (ii) is essential to the completeness of that activity. In determining whether property is used as an integral part of manufacturing, all properties used by the qualified person in processing the raw materials into the final product are properties used as an integral part of manufacturing.

(E) Fuels used or consumed in the manufacturing process.

(F) Property used in recycling.

(11) "Standard Industrial Classification" means a Standard Industrial Classification in the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.

(d) THREE-YEAR LIMITATION. Notwithstanding any other provision of this regulation, once a person has conducted business activities in a new trade or business for three or more years, that person will no longer be considered to be in a "new trade or business," nor "qualified" for this partial exemption.

(e) TAXES AS TO WHICH THE PARTIAL EXEMPTION DOES NOT APPLY. This partial exemption does not apply to any tax levied by a county, city, or district pursuant to, or in accordance with, either the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code §§ 7200 et seq.) or the Transactions and Use Tax Law (Rev. & Tax Code §§ 7251 et seq.).

On or after January 1, 1995, this partial exemption shall not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution.

(f) EXEMPTION CERTIFICATES. Except as otherwise set forth in subdivision (f)(3), to claim the partial exemption provided by this regulation, a person must be both pre-qualified by the Board and either registered to hold a seller's permit or maintain a consumer use tax account. Exemption certificates issued to qualified persons will contain a control number and expiration date for verifying a person's status as a qualified person. An exemption certificate is not valid if it has not been issued by the Board or if it is accepted after the expiration date on the certificate. Qualified persons who have been pre-qualified may reproduce the issued certificates as needed for their qualifying purchases.

The exemption certificates issued by the Board will be in substantially the same form as they appear in Appendices A and B of this regulation. Qualified persons who purchase or lease tangible personal property from an in-state retailer or an out-of-state retailer obligated to collect the use tax must provide the retailer with a manufacturer's exemption certificate in order to claim the partial exemption. The manufacturer's use tax declaration must be completed by a qualified person to claim a partial exemption from use tax on purchases of tangible personal property from an out-of-state retailer not obligated to collect the use tax.

Solely for the purposes of this regulation, it is presumed that a seller accepts a manufacturer's exemption certificate from a prequalified purchaser in good faith in the absence of evidence to the contrary. A retailer's direct knowledge that the purchaser is not purchasing tangible personal property for use in a manufacturing activity, that the purchaser intends the tangible personal property for his or her own use, or that the tangible personal property does not have a normal useful life of one year or more constitutes evidence to the contrary. A purchaser providing a manufacturer's exemption certificate accepted in good faith by the seller for tangible personal property that does not qualify for this exemption is liable for the payment of tax as set forth in subdivision (h).

(1) MANUFACTURER'S EXEMPTION CERTIFICATES.

(A) In General. Except as otherwise provided in subdivision (f)(1)(B) or (f)(3) of this regulation, or in section 6902.2 of the Revenue and Taxation Code, a partial exemption from sales or use tax shall not be allowed unless:

1. The qualified person furnishes the retailer with a manufacturer's exemption certificate no later than 60 days after the date of the purchase; and

2. The retailer timely files a sales and use tax return claiming the partial exemption and, together with that timely return, provides the Board with a copy of the manufacturer's exemption certificate.

(B) Exclusions. Except as provided in subdivision (f)(1)(C) below, retailers claiming the partial exemption in timely filed returns will not be required to furnish the Board with copies of manufacturer's exemption certificates for sales or leases of tangible personal property made by a retailer at any single physical location to a single qualified purchaser that do not exceed an aggregate total of $25,000 during a single calendar quarter. Regardless of the total quarterly sales per purchaser, however, when necessary for the efficient administration of the sales and use tax law, the Board may, on 30 days' written notice, require a retailer to commence furnishing the Board with copies of all certificates on a quarterly basis pursuant to subdivision (f)(1)(A)2.

(C) Retention and Availability of Certificates. A retailer must retain each manufacturer's exemption certificate received from a qualified person for a period of four years from the date on which the retailer claims a partial exemption based on the exemption certificate.

Within 45 days of the Board's request, retailers must furnish to the Board any and all manufacturer's exemption certificates, or copies thereof, received from qualified persons, including exemption certificates for aggregate sales or leases of $25,000 or less to a single qualified person made at any single physical location of the retailer during a single calendar quarter.

(2) MANUFACTURER'S USE TAX DECLARATION. Except as provided in section 6902.2 of the Revenue and Taxation Code, a partial exemption from the use tax shall not be allowed unless the qualified person:

(A) Timely files a sales and use tax return or consumer use tax return for the period in which the purchase occurs and timely pays any applicable tax in full that is excluded from this partial exemption as provided in subdivision (e) of this regulation; and

(B) Attaches a completed manufacturer's use tax declaration to the sales and use tax return or consumer use tax return that is timely filed with the Board.

(3) REFUND OF PARTIAL EXEMPTION.

(A) For the period commencing on January 1, 1994, and ending on December 31, 1994, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a manufacturer's exemption certificate on or before March 31, 1995. The retailer must refund the tax directly to the purchaser or, at the purchaser's sole option, the purchaser may be credited with such amount. In the event that the retailer has already reported and paid the tax to the Board, the retailer must file a written claim for refund on or before April 30, 1995.

(B) A person who paid sales tax on a qualified sale or paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for such a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation code section 6901. For transactions subject to use tax, a person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part.

(4) CONSTRUCTION CONTRACTORS. In the case of a contractor who purchases property as an agent of a qualified person or for subsequent resale to a qualified person, the qualified person is deemed to be the purchaser for purposes of this subdivision.

(g) CONVERSION OF PROPERTY TO A USE NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Notwithstanding subdivision (a), this partial exemption shall not apply to any sale of, or the storage, use, or other consumption in this state of property that, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, is: (i) removed from this state, (ii) converted from an exempt use under this regulation to some other use not qualifying for the partial exemption, or (iii) used in a manner not qualifying for the partial exemption under this regulation. For purposes of this subdivision, property is converted to a use not qualifying for the partial exemption if, without limitation, the property, or any interest in the property, or possession or control of the property, is either directly or indirectly sold, transferred, leased, or assigned to a person who is not a qualified person on the date the property is sold, transferred, leased, or assigned to such nonqualified person. In the case of a corporation that, as a qualified person, purchases tangible personal property under this partial exemption and then, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by that corporation in an exempt use, either directly or indirectly transfers that property to its parent corporation that is not a qualified person on the date of the transfer of property to the parent corporation, that property has been converted to a use not qualifying for the partial exemption.

(h) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX. If a purchaser submits a copy of a manufacturer's exemption certificate to the seller, and then within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, the purchaser either (i) removes that property from this state, (ii) converts that property from an exempt use under this regulation to some other use not qualifying for the partial exemption, or (iii) uses that property in a manner not qualifying for the partial exemption under this regulation, then, in that event, the purchaser shall be liable for payment of sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used; and the sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale. For purposes of this subdivision, property is converted to a use not qualifying for the partial exemption if, without limitation, the property, or any interest in the property, or possession or control of the property, is either directly or indirectly sold, transferred, leased, or assigned to a person who is not a qualified person on the date the property is sold, transferred, leased, or assigned to such nonqualified person.

(i) LEASES TO QUALIFYING PERSONS.

(1) LEASES—IN GENERAL. Subject to all the limitations and conditions set forth in this regulation and regulation 1525.3, this partial exemption may apply to rental receipts paid by a qualified person with respect to a lease of tangible personal property to the qualified person, which tangible personal property is used as set forth in subdivisions (a)(1), (a)(2), (a)(3), or (a)(4) of this regulation.

(2) LEASES—ACQUISITION SALE AND LEASEBACK. A person will be regarded as having paid sales tax reimbursement or use tax with respect to that person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.

(3) SUBSEQUENT LEASE OF PROPERTY ACQUIRED SUBJECT TO PARTIAL EXEMPTION. If a person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rental receipts.

(j) OPERATIVE DATE. Except as expressly set forth otherwise in subdivisions (c)(5)(A)6 and (e) of this regulation, this regulation is operative as of January 1, 1994. All provisions of this regulation cease to be operative as of January 1, 2004, as provided by Revenue and Taxation Code section 6377(g). Retailers and qualified persons may not accept or claim any Section 6377 Manufacturer's Exemption Certificates for a sale or a use made after December 31, 2003.

History: Adopted February 9, 1995, effective August 18, 1995.

Amended November 7, 1997, effective December 7, 1997. Added new subdivision (c)(4) to incorporate provisions of Chapter 954, Statutes of 1996 and renumbered the following subdivisions. Subdivision (i)(1) was amended to add reference to regulation 1525.3 and Appendix A & B were updated for clarity.

Amended December 8, 1998, effective April 3, 1999. Subdivision (f): phrase "Except . . . (f)(3)," added to first sentence. Subdivision (f)(3)(B): phrase "does not" added and phrase "and . . . purchase" deleted; last sentence added. New subdivision (f)(3)(C) added.

Amended April 5, 2000, effective July 7, 2000. Subdivision (f)(3): former subdivisions (A) and (B) deleted. Unnumbered paragraph of former subdivision (f)(3)(B) redesignated (f)(3)(A) and former subdivision (f)(3)(C) redesignated as (f)(3)(B). In redesignated subdivision (f)(3)(B): Two references to "use tax" deleted. In the first sentence, phrase "self-reported and" after "a person who," and "from a retailer not engaged in business in this state," after "on a qualified purchase" deleted; phrases "sales" after "paid" and "on a qualified sale or paid use tax" after "a person who paid sales tax" added. Phrase "for transactions subject to use tax," added in the third sentence. Last sentence "for transactions subject to sales tax . . . claimed under this part" added.

Amended November 1, 2000, effective January 1, 2001. Subdivision (a)—phrase "For the period" and "and ending on December 31, 2000" added to third sentence; last sentence of first paragraph added. "Subsection(s)" changed to "subdivision(s)" throughout regulation. Appendices (A) and (B)—incorporated new tax rate of 4.75% effective January 1, 2001, in first paragraph.

Amended March 28, 2001, effective July 5, 2001. Subdivision (c)(6)(A)6.b.—Internal Revenue Code section corrected to 1221(a)(1). Subdivision (c)(9)(B)—in second sentence, phrase "for . . . presumed" added, uppercase "T" replaced with lowercase "t" in "tangible;" and phrases "or . . . less" and "for purposes of this regulation" deleted. Third sentence added. Subdivision (c)(10)(B)—phrase "be presumed to" added. Third sentence added. Subdivision (f)—second unnumbered paragraph added. Exhibits (A) and (B)—Statement "Certificate Not Valid for Purchases with a Unit Value of $250 or Less" deleted.

Amended October 29, 2001, effective May 17, 2002. Subdivision (a) added ending date for the 4.75% tax rate and added new paragraph incorporating the new tax rate of 5% effective January 1, 2002. Appendices A and B revised to incorporate the new 5.0% tax rate and to make minor grammatical and formatting changes to improve clarity.

Amended September 12, 2002; effective December 3, 2002. Titles of subdivisions (f)(1)(A), (B), & (C)—changed from all capitals to capital and small-case format. Appendices A and B: Phrase "(*See below for leases)" added to certificate number box. Added to body of certificate under invoice block are sentences "Taxable rentals payable from the lease of certain tangible personal property to a qualified person are subject to the partial exemption for a period of six years from the date of inception of the lease. The lease must commence during the time in which this Certificate is valid."

Amended December 14, 2004; effective February 16, 2005. Subdivision (a): phrase "and ending on December 31, 2003," added to fourth unnumbered paragraph. New fifth unnumbered paragraph added. Subdivision (j): new second and third sentences added.

section 6377 manufacturer's exemption certificate
section 6377 manufacturer's use tax declaratione

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Regulation 1525.3. Manufacturing Equipment—Leases of Tangible Personal Property.

Reference: Sections 6244.5 and 6377, Revenue and Taxation Code.

(a) GENERAL APPLICATION TO LEASES. Leases of tangible personal property which are classified as "continuing sales" and "continuing purchases" of tangible personal property, in accordance with Regulation 1660, "Leases of Tangible Personal Property—In General," may qualify for the partial exemption from tax for manufacturing equipment, under the conditions set forth in paragraph (i)(1) of Regulation 1525.2, "Manufacturing Equipment." Lease transactions which qualify for the partial exemption are taxed at the rate specified in Regulation 1525.2, paragraph (a).

(b) RECHARACTERIZATION. With respect to transactions which the parties denominate as a "lease," but which are recharacterized for sales and use tax purposes either as sales at their inception, pursuant to Regulation 1641, "Credit Sales and Repossessions," paragraph (b), or as sales under a security agreement, Regulation 1660, "Leases of Tangible Personal Property In General," paragraph (a)(2), the transactions may qualify for the partial exemption, in accordance with Regulation 1525.2.

(c) CONTINUATION OF PARTIAL EXEMPTION. Where possession of tangible personal property is transferred to a qualified person as defined in paragraphs (c) and (d) of Regulation 1525.2 and pursuant to a lease agreement classified as a continuing sale and continuing purchase, lease receipts shall remain partially exempt for a period of six years from the date of the inception of the lease whether or not the lessee remains as a qualified person throughout the six year period. At the close of the six year period from the date of the inception of the lease, lease receipts are subject to tax without exemption.

(d) LEASES OF TAX-PAID PROPERTY. The partial exemption is not available to lessors who lease to qualified persons or to vendors to such lessors when the lessor elects to pay sales tax reimbursement at the time of acquisition of the property or pays use tax measured by the purchase price of the property.

(e) MANUFACTURERS WHO LEASE QUALIFIED PROPERTY. A lease of tangible personal property by the manufacturer of that property is ordinarily regarded as a "continuing sale" and "continuing purchase" in accordance with Regulation 1660, "Leases of Tangible Personal Property In General." Nevertheless, beginning January 1, 1997, a lessor of tangible personal property described in sections 17053.49 or 23649 of the Revenue and Taxation Code, who is the manufacturer of that property and who leases that property to a qualified person, as defined in section 17053.49 or 23649 of the Revenue and Taxation Code, in a form that is not substantially the same form as acquired, may, in lieu of reporting tax measured by the rentals payable, elect to pay tax measured by the cost price of that property where the election is made on or before the due date of the return for the period in which the property is first leased to the qualified person. The election shall be made by reporting use tax measured by the cost price of that property on the return for that period. The election shall not be revoked with respect to the property as to which it is made. The lease of that property for which an election is made to report and pay tax on the cost price of that property shall thereafter be excluded from the classification of a "continuing sale" and "continuing purchase."

For purposes of this subdivision, "cost price" means the price at which similar property has been previously sold or offered for sale. If that property has not been previously sold or offered for sale, then the cost price shall be deemed to be the aggregate of the following:

(1) Cost of materials.

(2) Direct labor.

(3) The pro rata share of all overhead costs attributable to the manufacture of the property.

(4) Reasonable profit from the manufacturing operations which, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the factors listed in subsections (1) to (3), inclusive.

(f) OPERATIVE DATE. All provisions of this regulation cease to be operative as of January 1, 2004, as provided by Revenue and Taxation Code section 6377(g). Retailers and qualified persons may not accept or claim any Section 6377 Manufacturer's Exemption Certificates for a sale or use made after December 31, 2003.

History: Adopted January 10, 1996, effective April 4, 1996.

Amended November 4, 1997, effective December 4, 1997. Amended subdivision (c) and added new subdivision (e) to incorporate provisions of Chapter 954, Statutes of 1996.

Amended December 14, 2004, effective February 15, 2005. Added new subdivision (f). Added section "6244.5" to the Reference section.


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Regulation 1525.5. Manufacturing By-Products and Joint-Products.

Reference: Sections 6094 and 6244, Revenue and Taxation Code.

(a) IN GENERAL. Manufacturers and refiners are consumers of tangible personal property purchased for the purpose of use and consumed in the manufacturing or refining process, including that portion of purchased raw materials that comprise by-products that are produced and consumed during the manufacturing or refining process, or subsequent thereto.

(b) DEFINITIONS.

(1) Property Purchased. As used herein the term "property purchased" means materials that have been acquired in a transaction defined as a "purchase" pursuant to Section 6010 of the Revenue and Taxation Code and includes property acquired by purchase from a joint venture of which the manufacturer or refiner is a member.

(2) Split-Off Point. The point at which joint products being manufactured or refined become separately identifiable.

(3) Separable Costs. All costs incurred to further process and dispose of products and by-products after split-off point.

(4) By-Products. As used herein the term "by-products" means products simultaneously produced from the manufacturing process, including joint-products.

(5) Net Realizable Value. The market value or sales value of a product or by-product less costs of completion and disposal after split-off point, if any.

(c) COMMINGLED GOODS. When a manufacturer or refiner purchases property for resale, and prior to or during the refining or manufacturing process, physically commingles these materials with property not so purchased of such similarity that the identity of the materials that comprise this commingled mass cannot be determined, by-products that are produced from the mass of commingled goods and consumed shall be deemed to be first consumed from the property not purchased for resale until a quantity of commingled goods equal to the quantity of property not purchased for resale has been consumed.

Any manufacturer or refiner that claims its consumed by-products are not subject to tax, because of the physical commingling of property purchased and property not so purchased, must establish by its records that this commingling occurred prior to such consumption.

(d) REPORTING METHODS.

(1) Manufacturers or refiners that consume by-products that are produced during the manufacturing or refining process from purchased raw material may use any method of cost allocation consistent with generally accepted accounting principles that accurately computes the purchased cost of the consumed raw materials to report their tax liability for the reporting period in which the use was made. The manufacturer or refiner must be prepared to demonstrate by records which can be verified by audit that the method used properly reflects their tax liability.

(2) The following is a description of an approved method that manufacturers and refiners that consume by-products from purchased materials may utilize to compute their tax liability:

(A) Determine the split-off point for by-products that are used.

(B) Determine the net realized values of all products and by-products.

(C) Determine the net realizable value(s) of by-product(s) used.

(D) Divide the net realizable value(s) of by-product(s) used (Step C) by the net realizable values of all products and by-products (Step B) to obtain a taxable ratio.

(E) Multiply the purchase cost of all raw materials added to the manufacturing or refining process prior to the split-off by the taxable ratio (Step D) to find the measure of the tax liability resulting from the use of by-products.

The following formulas summarize the above steps:

MV = Market Value

PC = Purchase Cost

SC = Separable Costs Beyond Split-Off

bp = By-Products Used

tp = Total Products and By-Products

Where no processing is necessary beyond split-off to obtain market value so that MV equals market or sales value at split-off:

MV
bp × PC = MEASURE OF TAX
MV
tp

Where processing beyond split-off is necessary to obtain market value so that MV equals market or sales value beyond split-off:

MV - SC
bp bp × PC = MEASURE OF TAX
MV - SC
tp tp

Note: MV - SC = Net Realizable Value at Split-Off

(e) To ensure compliance with the provisions of this regulation, manufacturers and refiners are encouraged to obtain approval by the Board prior to adopting a method of calculating their tax liability incurred as a result of the consumption of purchased raw materials produced and consumed during the manufacturing or refining process.

(f) AUDITS. Taxpayers using the suggested method or an alternate method that has been approved by the Board will normally be audited by application of the same approved procedure in the audit to verify the accuracy of reported amounts. Determinations may be imposed or refunds granted if the Board, upon audit of the books and records, determines that the amounts reported by return did not accurately disclose the amount of tax due.

History: Adopted June 27, 1984, effective March 27, 1985.


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Regulation 1525.7. Rural Investment Tax Exemption.

Reference: Section 6378.1, Revenue and Taxation Code.

(a) GENERAL. Commencing on and after January 1, 2001, and before January 1, 2006, section 6378.1 of the Revenue and Taxation Code authorizes the Rural Investment Tax exemption (hereafter "Partial Exemption") which provides a partial exemption from sales or use taxes imposed on the gross receipts from the sale of, and the storage, use, or other consumption in this state, of tangible personal property as defined in subdivision (b)(6) by an eligible entity as defined in subdivision (b)(3).

For the period commencing on January 1, 2001, and ending on December 31, 2001, the Partial Exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the Partial Exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, the Partial Exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

The California Infrastructure & Economic Development Bank (CIEDB) Board determines who is eligible to receive this Partial Exemption and monitors eligible entities for compliance with the requirements of the Partial Exemption. As the aggregate amount of this Partial Exemption is limited, the CIEDB Board determines the amount of this Partial Exemption available to each eligible entity.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Board" refers to the Board of Equalization.

(2) "CIEDB Board" refers to the California Infrastructure & Economic Development Bank Board.

(3) "Eligible entity" means any entity that meets all of the following:

(A) The entity is deemed eligible for the Partial Exemption in writing by the CIEDB Board.

(B) The entity has been pre-qualified, and re-qualified as applicable, by the Board and registered to hold a California seller's permit or maintain a consumer use tax account.

(4) "Primarily" means used 50 percent or more of the time in a qualified county for the one-year period following the date of purchase of the property. Tangible personal property shall not be considered used for any period of time that the property is located outside a qualified county, regardless of how the property is used while outside the qualified county.

(5) "Qualified county" means a California county with an average annual unemployment rate of five percentage points or more above the statewide average for the most recent calendar year as determined by the State of California, Employment Development Department.

(6) "Tangible personal property" includes all of the following:

(A) Machinery and equipment within the meaning of subsection (a)(6) of Regulation 1521 of the Sales and Use Tax Regulations, including component parts and contrivances such as belts, shafts, moving parts, and operating structures. The terms also include conveyance systems and assembly lines without regard to the manner of affixation to real property.

(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, including both operating programs and application programs, 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. Repair and replacement parts with a useful life of more than one year may qualify for this Partial Exemption even where such items are expensed for income tax purposes under the special provisions of section 179 of the Internal Revenue Code (26 U.S.C. § 179).

(7) "Tangible personal property" does not include any of the following:

(A) Any tangible personal property that is used primarily in administration, general management, or marketing.

(B) Furniture, inventory, or equipment used to store products.

(C) Any property for which a credit is claimed under either Section 17053.49 or 23649 of the Revenue and Taxation Code.

(D) Materials or fixtures within the meaning of subsections (a)(4) and (a)(5), respectively, of Regulation 1521 of the Sales and Use Tax Regulations, including such items set forth in Appendices A and B of Regulation 1521.

(E) Fuels.

(F) Real property.

(c) PARTIAL EXEMPTION CERTIFICATES.

(1) OBTAINING AND MAINTAINING THE PARTIAL EXEMPTION CERTIFICATE. To obtain a Partial Exemption certificate, an entity must be pre-qualified by the Board, registered to hold a California seller's permit or maintain a consumer use tax account, and be deemed eligible for the Partial Exemption by the CIEDB Board. An entity shall include in its application a copy of its written notification from the CIEDB Board verifying the entity's eligibility and the amount allocated by the CIEDB Board for use by that eligible entity pursuant to the Partial Exemption. Partial Exemption certificates issued to eligible entities will contain a control number and expiration date for verifying the entity's status as an eligible entity. To maintain a Partial Exemption certificate it may be necessary to re-qualify with the Board periodically in accordance with Revenue and Taxation Code section 6378.1. A Partial Exemption certificate is not valid if it has not been issued by the Board or if it is accepted after the expiration date on the certificate. Eligible entities that have been pre-qualified or re-qualified, as applicable, may reproduce the issued certificates as needed for their qualifying purchases.

The Partial Exemption certificates issued by the Board will be in substantially the same format as they appear in Appendices A and B of this regulation. Eligible entities who purchase or lease tangible personal property from an in-state retailer or an out-of-state retailer obligated to collect the use tax must provide the retailer with a Partial Exemption certificate in order to claim the Partial Exemption. The Partial Exemption Use Tax Declaration must be completed by an eligible entity to claim a Partial Exemption from use tax on purchases of tangible personal property from an out-of-state retailer not obligated to collect the use tax.

For purposes of this regulation, it is presumed that a seller accepts a Partial Exemption certificate from a purchaser in good faith in the absence of evidence to the contrary.

(2) CLAIMING THE PARTIAL EXEMPTION.

(A) IN GENERAL. The Partial Exemption from sales or use tax authorized under this part shall not be allowed unless:

1. The eligible entity furnishes the retailer with a Partial Exemption certificate no later than 60 days after the date of purchase; and

2. The retailer timely files a sales and use tax return claiming the Partial Exemption and, together with that timely return, provides the Board with a copy of the Partial Exemption certificate.

(B) EXCLUSIONS. Except as provided in subdivision (c)(2)(C) below, retailers claiming the Partial Exemption in timely filed returns will not be required to furnish the Board with copies of Partial Exemption certificates for sales or leases of tangible personal property made by a retailer at any single physical location to a single eligible entity that do not exceed an aggregate total of $25,000 during a single calendar quarter. Regardless of the total quarterly sales per purchaser, however, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may, on 30 days written notice, require a retailer to commence furnishing the Board with copies of all certificates on a quarterly basis pursuant to subdivision (c)(2)(A)2.

(C) RETENTION AND AVAILABILITY OF CERTIFICATES. A retailer must retain each Partial Exemption certificate received from an eligible entity for a period of not less than four years from the date on which the retailer claims a Partial Exemption based on the Partial Exemption certificate.

Within 45 days of the Board's request, retailers must furnish to the Board any and all Partial Exemption certificates, or copies thereof, received from eligible entities, including Partial Exemption certificates for aggregate sales or leases of $25,000 or less to a single eligible entity made at any single physical location of the retailer during a single calendar quarter.

(3) PARTIAL EXEMPTION USE TAX DECLARATION. A Partial Exemption from the use tax shall not be allowed unless the eligible entity:

(A) Timely files a sales and use tax return or consumer use tax return for the period in which the purchase occurs and timely pays any applicable tax in full that is excluded from this Partial Exemption as provided in subsection (a) of this regulation; and

(B) Attaches a completed Partial Exemption Use Tax Declaration (Appendix B) to the sales and use tax return or consumer use tax return that is timely filed with the Board.

(d) REFUND OF PARTIAL EXEMPTION.

(1) For the period commencing on January 1, 2001, and ending on June 30, 2002, an eligible entity may claim the Partial Exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a Partial Exemption certificate on or before September 30, 2002. The retailer must refund the tax or tax reimbursement directly to the purchaser or, at the purchaser's sole option, the purchaser may be credited with such amount. In the event that the retailer has already reported and paid the tax to the Board, the retailer must file a written claim for refund on or before October 31, 2002.

(2) An eligible entity who paid sales tax on a qualified sale or paid use tax on a qualified purchase and who failed to claim the Partial Exemption as provided by this regulation may file a claim for refund equal to the amount of the Partial Exemption that he or she could have claimed pursuant to this regulation. The procedure for such a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code Section 6901. For transactions subject to use tax, an eligible entity filing a claim for refund of the Partial Exemption has the burden of establishing that he or she was entitled to claim the Partial Exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the Partial Exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of an eligible entity at the time of the purchase subject to the refund claimed under this part.

(e) IMPROPER USE OF PARTIAL EXEMPTION.

(1) CONVERSION OF PROPERTY TO A USE NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Notwithstanding subdivision (a), this Partial Exemption shall not apply to any sale of, or the storage, use, or other consumption in this state of property that, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, is: (i) removed from a qualified county, (ii) converted from an exempt use under this regulation to some other use not qualifying for the Partial Exemption, or (iii) used in a manner not qualifying for the Partial Exemption under this regulation.

For purposes of this regulation, property is converted to a use not qualifying for the Partial Exemption if, without limitation, the property, or any interest in the property, or possession or control of the property, is either directly or indirectly sold, transferred, leased, or assigned to an entity who is not an eligible entity on the date the property is sold, transferred, leased, or assigned to such non-eligible entity. In the case of a corporation that, as an eligible entity, purchases tangible personal property under this Partial Exemption and then, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by that corporation in an exempt use, either directly or indirectly transfers that property to its parent corporation that is not an eligible entity on the date of the transfer of property to the parent corporation, that property has been converted to a use not qualifying for the Partial Exemption.

Tangible personal property shall not be considered used in a qualifying manner for any period of time that the property is located outside a qualified county, regardless of how the property is used while outside such a county.

(2) PURCHASES BY INELIGIBLE ENTITIES. Notwithstanding subdivision (a), this Partial Exemption shall not apply if the CIEDB Board subsequently determines that a purchaser is not an eligible entity pursuant to Revenue and Taxation Code section 6378.1.

(3) PURCHASES EXCEEDING THE PARTIAL EXEMPTION ALLOTMENT. Notwithstanding subdivision (a), this Partial Exemption shall not apply to any sale of, or the storage, use, or other consumption in this state of tangible personal property purchased by an eligible entity that exceeds the amounts allocated by the CIEDB Board for use by that eligible entity pursuant to the partial exemption.

(f) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX.

(1) If a purchaser timely submits a copy of a Partial Exemption certificate to the seller or Partial Exemption Use Tax Declaration to the Board, and then within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, the purchaser either (i) removes that property from a qualified county, (ii) converts the property from an exempt use under this regulation to some other use not qualifying for the Partial Exemption, or (iii) uses that property in a manner not qualifying for the Partial Exemption under this regulation, then, in that event, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used.

(2) A purchaser providing a Partial Exemption certificate accepted timely and in good faith by the seller or a Partial Exemption Use Tax Declaration to the Board for tangible personal property that does not qualify for the Partial Exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased.

(g) LEASES TO QUALIFYING PERSONS.

(1) LEASES—IN GENERAL. Subject to all the limitations and conditions set forth in this regulation, this Partial Exemption may apply to rental receipts paid by an eligible entity with respect to a lease of tangible personal property to the eligible entity.

(2) LEASES—ACQUISITION SALE AND LEASEBACK. An eligible entity will be regarded as having paid sales tax reimbursement or use tax with respect to that eligible entity's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the eligible entity has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the Partial Exemption from tax provided by this regulation.

(3) SUBSEQUENT LEASE OF PROPERTY ACQUIRED SUBJECT TO PARTIAL EXEMPTION. If an eligible entity has acquired property subject to the Partial Exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rental receipts.

(h) RECORDS. Adequate and complete records must be maintained by the eligible entity as evidence that the property purchased qualifies under the provisions of this regulation and that the property was used by the eligible entity. The eligible entity must also maintain detailed records to show the amount of the tax benefit derived from this Partial Exemption as each eligible entity will have an annual limit established by the CIEDB Board.

The Board shall, within one year after being notified by the CIEDB Board that an entity has not fulfilled the requirements of Revenue and Taxation Code section 6378.1, examine the books and records of the entity, and issue a determination of any liabilities due.

(i) OPERATIVE DATE. This regulation is operative as of January 1, 2001 and expires December 31, 2005 unless Revenue and Taxation Code section 6378.1 is extended by an act of the Legislature.

History: Adopted June 7, 2002, effective July 7, 2002.

Amended June 30, 2004, effective August 19, 2004. Subdivision (a)—in 2nd un-numbered paragraph added phrase "and ending on June 30, 2004," added new third unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004. Deleted the phrase ", part of the California Technology, Trade & Commerce Agency," from the fourth un-numbered paragraph. Appendices A and B: added the phrase " through June 30, 2004; and 5.25% effective July 1, 2004."

Section 6378.1 - Rural Ivestment Tax Exemption Certificate

Section 6378.1 - Rural Ivestment use Tax Declaration


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Regulation 1526. Producing, Fabricating and Processing Property Furnished by Consumers—General Rules.

Reference: Section 6006, Revenue and Taxation Code.

Alterations of new garments, see regulation 1524 (Section 1524 of Title 18).

Printing and Imprinting, see regulation 1541 (Section 1541 of Title 18).

Repairing and Reconditioning Generally, see regulation 1546 (Section 1546 of Title 18).

(a) IN GENERAL. Tax applies to charges for producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing or imprinting.

(b) OPERATIONS INCLUDED REPAIRING AND RECONDITIONING DISTINGUISHED. Producing, fabricating, and processing include any operation which results in the creation or production of tangible personal property or which is a step in a process or series of operations resulting in the creation or production of tangible personal property. The terms do not include operations which do not result in the creation or production of tangible personal property or which do not constitute a step in a process or series of operations resulting in the creation or production of tangible personal property, but which constitute merely the repair or reconditioning of tangible personal property to refit it for the use for which it was originally produced.

(c) OPERATIONS INCLUDED—STRETCH LIMOUSINES. Producing, fabricating, and processing include any operation which results in the creation or production of a stretch limousine. The following rules apply in determining the measure of tax for converting a vehicle into a stretch limousine:

(1) When a vehicle dealer, at the request of a consumer, has a conversion company convert (i.e., stretch) a vehicle into a limousine, the tax does not apply to the conversion company's charge to the dealer, but the tax does apply to the entire charge made to the consumer by the dealer for the conversion.

(2) When a consumer provides the conversion company with a vehicle for conversion into a stretch limousine, the tax applies to the entire charge made to the consumer by the conversion company.

History: Effective July 1, 1939.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended and renumbered August 5, 1969, effective September 6, 1969.

Amended October 19, 1988, effective January 11, 1989. In subdivision (c), amended regulation to include within the definition of producing, fabricating, and processing any operation which results in the creation or production of a stretch limousine.


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Regulation 1527. Sound Recording.

Reference: Sections 6006, 6010–6012, and 6362.5, Revenue and Taxation Code.

(a) RECORDING STUDIOS.

(1) Tax does not apply to the charges for the making of an original recording on recording media if the recording media is not delivered to the customer or to any person at the direction of the customer, and title is retained by the studio. If, however, the recording studio agrees to furnish finished records, acetates, tapes or other recording media, tax applies to the sale of such tangible personal property but, effective January 1, 1976, the measure of tax is limited to the sale price of the unprocessed recording media. Recording media includes wax, tape, wire, or other material used to embody sound.

(2) Rental of Studio Facilities. To the extent that the studio which is making the recording rents tangible personal property to the customer, tax applies in the same manner as it does to rentals generally.

(b) MASTER TAPES AND RECORDS.

(1) "Master tapes and master records embodying sound" means tapes, records, and other devices, not including mothers, stampers or finished records, utilized by the recording industry in making recordings embodying sound. The term includes, but is not limited to tapes or records which are produced for the immediate purpose of auditioning or demonstrating the particular artistic talents contained therein. The term includes tapes or records which are produced for use as radio commercials or other advertising, syndicated radio programs or for educational purposes. The term does not include recordings for video games or seismic surveys.

(2) Measure of Tax. Effective January 1, 1976, the measure of tax with respect to the retail sale of master tapes or master records embodying sound is limited to the sale price of the unprocessed recording media. The measure of tax does not include charges for labor in recording sound, services rendered in producing, fabricating, processing or imprinting the master tapes, any other services or production expenses or amounts paid for the copyrightable, artistic, or intangible elements of master tapes or master records, whether designated as royalties or otherwise. Tax applies to subsequent retail sales of master records and tapes in the same manner as tax applies to the original retail sale. (See Regulation 1529 for application of tax to recording sound for motion pictures.)

(3) Intermediate Working Products. The recording of sound on intermediate recording media used to produce a master tape or master record is included within the exemption for master tapes and records under (b)(2). For example, studio charges for recording on multi-track tape which is to be mixed down and transferred to two-track tape are not subject to tax. Tax applies only to the sale of the unprocessed recording media.

(4) Safety Tapes. Charges for the production of a safety copy of the master tape or master record exempt under (b)(2) are not subject to tax. Charges for the unprocessed recording media are subject to tax.

(c) PROCESSORS. The furnishing of "mothers," "stampers," and finished records by a processor to a record manufacturer constitutes a sale of tangible personal property and tax applies thereto.

(d) LIBRARY PRODUCERS. Tax applies to rentals of records and other tangible personal property by library producers in the same manner as it does to rentals generally whether designated as a license to use or otherwise.

History: Effective August 1, 1933.

Amended February 16, 1949.

Amended September 2, 1965.

Applicable as amended August 1, 1965.

Amended and renumbered November 3, 1971, effective December 3, 1971.

Amended November 14, 1974, effective December 22, 1974. Renamed regulation, updated terminology, cross-referenced to Regulation 1529, and added (a)(3) and (4) which give tax ramifications of recording sessions manned by customer's own personnel and of sale or rental of master recordings or tapes themselves.

Amended December 17, 1975, effective January 1, 1976. Limited tax on sales of master tapes and recordings to fabrication costs and defined "recording studio" and "master tapes or master records embodying sound."

Amended April 9, 1985, effective August 14, 1985. In subdivision (a)(1), amended to use the term "recording media" in place of "wax, tape or wire"; and limited the measure of tax to the sale price of the unprocessed recording media. Deleted subdivisions (a)(3), (4), (5) and (6). Added new subdivisions (b)(1), (2), (3) and (4) to define "master tapes and master records embodying sound"; relettered remaining subdivisions. In relettered subdivision (c), substituted the term "mothers" for "masters" and substituted the term "record manufacturer" for "producer".


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Regulation 1528. Photographers, Photocopiers, Photo Finishers and X-Ray Laboratories.

Reference: Sections 6006, 6009, 6015, and 6020, Revenue and Taxation Code.

(a) PHOTOGRAPHERS AND PHOTOCOPIERS. Tax applies to sales of photographs, whether or not produced to the special order of the customer. Tax applies to sales of photocopies, whether or not produced to the special order of the customer, and to charges for the making of photographs or photocopies out of materials furnished by the customer or others. Except as provided in subdivision (b)(2), no deduction is allowable on account of expenses such as travel time, telephone calls, rental of equipment, or salaries or wages paid to assistants or models, whether or not such expenses are itemized in billings to customers.

Tax does not apply to sales to photographers and persons who make photocopies of tangible personal property which becomes an ingredient or component part of photographs or photocopies sold, such as mounts, frames, sensitized paper, and toner but does apply to sales to the photographer or producer of materials used in the process of making the photographs or photocopies and not becoming an ingredient or component part thereof, such as chemicals, trays, films, plates, proof paper cameras, and copy machine drums.

See Regulation 1540, Advertising Agencies and Commercial Artists, for transfers of photographic images by commercial artists.

(b) PHOTOCOPYING OF RECORDS.

(1) GENERAL RULES. Tax applies to sales of photocopies of records. Persons who make and sell, or obtain and sell, photocopies of records to consumers are retailers of the photocopies whether they make the photocopies themselves, hire a subcontractor to make the photocopies, or acquire the photocopies for resale from the person who owns or maintains the records. Tax applies whether or not the copies are made at the business location of the retailer or at the location of the person who owns or maintains the records. The tax applies to the entire charge for making and selling, or obtaining and selling, photocopies, without deduction for expenses incurred in obtaining access to the records, travel time, time spent in selecting the particular records desired, the field service of photocopying or microfilming the records, telephone calls, file setup charges, basic fees, typing fees, document handling fees, or any other costs or expenses of filling the customer's order.

(2) SERVICE TRANSACTIONS. Merely because a fee is charged in connection with the transfer of a photocopy of a record does not mean that the transaction is a sale transaction under the Sales and Use Tax Law. If a person who owns or maintains the records (recordholder) is required by law to furnish the photocopy upon tender and payment of a fee, the transfer of the photocopies by that person is not a sale. For sales and use tax purposes, that person is the consumer of the photocopies transferred and charges by a photocopy company to the recordholder for the photocopies are subject to tax.

(A) Medical Records. Ordinarily tax does not apply to charges made by a hospital or other health care provider (recordholder) for photocopying of medical records. The transaction is regarded as a service transaction, and the fees are nontaxable if the photocopies are furnished to the patient, or to someone acting on behalf of the patient, or to the patient's representative, as provided in Health and Safety Code section 123110(b). Likewise, the fees are nontaxable if the photocopies are furnished in response to a written authorization presented by an attorney or the attorney's representative as provided in Evidence Code section 1158, or if the photocopies are furnished as provided in subdivision (b)(2)(C) below. Tax does apply, however, if the hospital or other health care provider is not required by law to furnish photocopies but otherwise sells photocopies of records for a price. Charges made by a photocopy company directly to the requesting party for photocopies which, by agreement with the recordholder, were made and furnished directly to the requesting party are taxable in their entirety.

The preparation and service of a written authorization as provided in California Evidence Code Section 1158 is a nontaxable service. The tax does not apply to separately stated charges for this service even though the written authorization is served in connection with the performance of a contract to produce and deliver photocopies of records.

(B) Public Records. Tax does not apply to charges made by a public agency for photocopies of records furnished pursuant to the California Public Records Act or local law, ordinance, or resolution. Persons who obtain photocopies of public records from public agencies and sell the photocopies are making retail sales and must pay sales tax measured by their entire charge, including reimbursement of legally required fees.

(C) Witness Fees. Copying, witness, mileage or other fees which are charged by a person who furnishes copies of records in response to a subpoena as provided in California Evidence Code Section 1563 are not subject to tax. Separately stated charges by a photocopy company for the reimbursement of witness fees which were paid to the recordholder are not subject to tax. Tax does not apply to separately stated fees, made by a person who makes or acquires records for another for advancing payment of statutory witness fees. Such fees, commonly identified as "check charges", are made to cover the cost of providing the check, advancing moneys, and associated bookkeeping costs. When a witness fee is charged, the "check charge" will be regarded as part of the charge for a nontaxable service and not as a part of the charge made for the tangible personal property.

(3) PREPARATION OF SUBPOENA DUCES TECUM. The preparation and service of a subpoena duces tecum is a nontaxable service. The tax does not apply to separately stated charges made for the service even though the subpoena is served in connection with the performance of a contract to produce and deliver photocopies of records.

(4) TYPEWRITTEN TRANSCRIPTIONS AND INTERPRETATION OF MEDICAL RECORDS. The tax does not apply to a separately stated charge made for providing a typewritten transcription of a medical report or an interpretation of the contents of a medical record. However, the tax applies to the fair retail value of any photocopies produced for the customer in connection with the nontaxable service.

(c) PHOTO FINISHERS.

(1) PRINTS AND ENLARGEMENTS. Tax applies to charges for printing pictures or making enlargements from negatives or slides furnished by the customer.

Tax applies to sales to photo finishers of all tangible personal property used by them in printing pictures or making enlargements except property becoming an ingredient or component part of the prints, enlargements and other items sold by them.

(2) COLORING AND TINTING. Tax applies to charges for coloring and tinting new pictures.

Tax does not apply to sales of colors and tints to photo finishers for use by them in coloring and tinting new pictures.

(3) FILM PROCESSING.

(A) Negative Development of Customer Furnished Film. Tax does not apply to separately stated charges for the negative development of customer furnished film. Development of film by the reverse process method is not the negative development of film.

Tax applies to sales of chemicals for use in such negative development whether or not the chemicals become a component part of the negative.

(B) Other Film Processing. Tax applies to all film processing charges other than separately stated charges for the negative development of customer furnished film. For example, tax applies to charges for development of film by the reverse process method.

Tax applies to sales of chemicals for use in such film processing if the chemicals do not become a component part of the processed film transferred to customers. Tax does not apply to sales of chemicals which do become a component part of film sold to customers before use.

(d) X-RAY LABORATORIES. Producers of X-Ray films or photographs for the purpose of diagnosing medical or dental conditions of humans, excluding such films and photographs used only for cosmetic purposes, are the consumers of materials and supplies used in the production thereof. Thus, the tax applies to the sale of such materials and supplies to laboratories producing X-Ray films or photographs for the purpose of such diagnoses. Whether the laboratory is a "lay laboratory" or is operated by a physician, surgeon, dentist or hospital is immaterial. Producers of X-Ray films or photographs for any other purpose such as use for purely cosmetic purposes, diagnosis of medical or dental conditions of animals, inspection of metals, welds and similar purposes are retailers of the films or pictures and the tax applies to the gross receipts from the retail sale thereof. If, however, an X-Ray laboratory contracts to furnish an X-Ray inspection service, retaining title to and possession of the X-Ray or pictures produced, charges for the performance of such an inspection service are not subject to tax.

History: Effective June 1, 1951.

Amended July 18, 1951.

Amended November 3, 1969, applicable on and after November 10, 1969.

Amended by renumbering November 3, 1971, effective December 3, 1971.

Amended November 14, 1974, effective December 22, 1974. In (a) added explanation of tax on sales of photostatted records, revised (b) for clarity, and in (c) changed X-Ray producers of other than humans or animals from consumers to retailers.

Amended July 27, 1983, effective November 13, 1983. Revised subdivision (c) to delete reference to animals, added "or photographer" and added exclusion of use for "cosmetic purposes".

Amended March 6, 1985, effective June 2, 1985. Subdivision (a)(2) provides that when a hospital or other person or entity which furnishes copies of records in response to a written authorization presented to it by an attorney, or the attorney's representative, or a subpoena duces tecum served on it, the hospital or other person or entity is not subject to tax with respect to copying, witness, mileage, or other fees received by it pursuant to sections 1158 or 1568 of the Evidence Code. Subdivision (a)(2) also provides that fees for copies of records, when copies are provided through a copying service, remain nontaxable.

Amended August 1, 1991, effective August 27, 1991. Amended pursuant to Chapter 85, Statutes of 1991, and Chapter 88, Statutes of 1991, which repealed the exemption from sales and use tax for the sale or use of photographs when possession, but not title of the photograph, is transferred for the purpose of being reproduced one time only, in a newspaper regularly issued at average intervals not exceeding three months.

Amended June 26, 1997, effective October 4, 1997. Former subdivision (a)(1) is redesignated as subdivision (a), references to the terms "photostat producers" and "photostats" are replaced by "photocopiers" and "photocopies," respectively, and a cross-reference to new subdivision (b)(2) is added. Subdivision (a)(2) is deleted in its entirety and replaced with new subdivision (b).

Amended May 29, 2002, effective September 9, 2002. Subdivision (a)—Sentence "See Regulation 1540, Advertising Agency and Commercial Artists, for transfers of photographic images by commercial artists" added as second un-numbered paragraph.


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Regulation 1529. Motion Pictures.

Reference: Sections 6006, 6006.1, 6006.3, 6007, 6010, 6010.4, and 6010.6, Revenue and Taxation Code.

(a) GENERAL.

(1) A person who produces a motion picture or performs "qualified production services" is the consumer of, and tax applies to the sale to such persons of raw film, sound tape, or videotape stock; paintings; models; artwork; and other tangible personal property for such use.

(2) Tax does not apply to amounts charged for the right to exploit a qualified motion picture.

(3) Tax does not apply to charges for "qualified production services" performed by any person in any capacity (employee, agent, independent contractor or otherwise) in connection with the production of all or any part of a "qualified motion picture".

(4) Tax does not apply to charges for services performed by persons who do not fabricate or process tangible personal property, such as directors and lighting technicians. (See Regulation 1501 for a more detailed discussion.)

(b) APPLICATION OF TAX.

(1) QUALIFIED MOTION PICTURE. A "qualified motion picture" is any motion picture or portion thereof, whether finished or not, which is produced, adapted, or altered for exploitation in, on, or through any medium or by any device for any purpose, including, but not limited to, any entertainment, commercial, advertising, promotional, industrial, or educational purpose.

(A) Qualified motion picture includes, but is not limited to:

1. Motion pictures produced for display at theaters, amusement parks or on commercial carriers; television shows including closed circuit and broadcast; commercials; trailers; television spots; specials; featurettes; "promos"; "sneaks"; corporate training and sales presentations; video press kits; music videos; and special effects, titles, and credits which are embodied on film, tape, or other motion picture media.

2. Original and adapted versions including, but not limited to, adaptation to another language or another medium.

3. Motion pictures produced for the federal government or its instrumentalities, foreign governments, state and local governments, or political subdivisions thereof.

(B) Qualified motion picture does not include motion pictures produced for private noncommercial use, such as motion pictures of weddings or graduations to be used as family mementos, accident reconstruction videotapes to be used for legal analysis, or student films to be used for class projects.

(C) Tax does not apply to the transfer of all or part of, or any interest in, a qualified motion picture if either:

1. The transfer is prior to the date that the qualified motion picture is exhibited or broadcast to its general audience, or

2. The transfer is to any person holding either directly or indirectly, or by affiliation, any exploitation rights obtained prior to the date that the qualified motion picture is exhibited or broadcast to its general audience. For example, a transfer to any entity that has control over or is under the control of another entity that held any exploitation rights directly would not be subject to tax. Further, a transfer to an entity which is under common control with another entity which held exploitation rights directly would not be subject to tax. Control, as used herein, is the ability of any person, such as a corporate parent or other entity, to direct the policies or actions of another entity through stock or other ownership.

(2) QUALIFIED PRODUCTION SERVICES. "Qualified production services" are any fabrication performed by any person in any capacity (including, but not limited to, an employee, agent, or independent contractor) on film, tape, or other audiovisual embodiment in connection with the production of all or any part of any qualified motion picture. Qualified production services include, but are not limited to, photography; sound or music recording; creation of special effects or animation on film, tape or other audiovisual embodiment, including animation drawings, inkings, paintings, tracings and celluloid "cels"; technological modification, including colorizing; adaptation; alteration; computer graphics, including transfers of computer graphics on computer-generated media; sound dubbing or sound mixing; sound or music or effect transferring; film or tape editing or cutting; developing or processing of negatives or positives; timing; coding or encoding; creation of opticals, titles, main or end credits; captioning; and medium transfers (e.g., film to tape, tape to tape).

The term includes any such fabrication whether performed on the qualified motion picture before or after the release date. The term does not include work to manufacture release prints.

Qualified production services include processing performed on a qualified motion picture, except for processing to produce release prints. Processing includes film developing and processing; film to tape transfers; and sound transferring, rerecording, dubbing, and mixing.

(A) Performance of Services. Tax does not apply to charges for qualified production services. For example, tax does not apply to charges for photography, film developing other than of release prints, editing, or negative cutting performed on a qualified motion picture.

(B) Tangible Personal Property. A person who performs qualified production services is the consumer of, and tax applies to the sale to that person of, tangible personal property which that person uses in the performance of the services. For example, persons who perform nontaxable film and tape processing work are consumers of all chemicals and raw stock used in the process regardless that the final film or tape product is transferred to a customer.

Tax does not apply to the charge for the following tangible personal property transferred in connection with the performance of qualified production services:

1. Film, tape, or other embodiment upon which sound, visual images, or computer-generated graphics are created or recorded. See subdivision (d)(11)(B) for a list of film prints and tapes which are considered to be the product of qualified production services and distinguishable from release prints.

2. Paintings, models, and artwork (including drawings, inkings, tracings, celluloid "cels", or photostats used in the animation process) used by those filming special effects, titles, or credits regardless that title to the property may be transferred to the customer.

Sales of tangible personal property to persons who perform qualified production services are subject to tax. The person performing the services shall not issue a resale certificate when purchasing such property. The application of tax is the same regardless of whether the person contracts to furnish the services and the tangible personal property for one price or separately itemizes such charges and whether the product of the service is transferred in California or is shipped out of state.

(C) Retail Sales of Tangible Personal Property. Tax applies to other retail sales of tangible personal property by a person who performs qualified production services. For example, if a person who performs qualified production services purchases costumes or props to include in a scene and transfers title to the property to the customer in California, the retail sale of the costumes or props is subject to sales tax.

(D) Services In General.

1. Tax does not apply to charges for services which are not fabrication or processing of tangible personal property. Such nontaxable services commonly found in the motion picture industry include writing, acting, directing, casting, music composing, management, production consulting and services rendered by stage personnel not performing fabrication or processing labor; such as grips, property personnel, lighting technicians or transportation drivers. Persons rendering services are consumers of any tangible personal property which may be incidentally used in rendering the services. (See Reg. 1501.)

2. Charges for repairing, reconditioning, or restoring a qualified motion picture are not subject to tax. Such nontaxable services include the retiming, remounting, or laboratory splicing of negative or positive film, tape, or other audiovisual embodiment.

3. Appliance Make-up. A person who fabricates and applies expendable appliance make-up is the consumer of materials and make-up used. Tax does not apply to charges made to the customer.

4. Storyboards. The preparation of storyboards for either animation or live photography is a service, and tax does not apply to the charge.

5. Creative Art Services. Tax does not apply to charges or buyout fees for creative art services used in connection with the production, distribution or exploitation of a qualified motion picture. A person who provides creative art services is the consumer of tangible personal property used in the performance of such services and tax applies to the sale of property to the service provider. Tax does not apply to the charges for tangible personal property transferred in connection with the performance of creative art services.

However, if the service recipient subsequently displays the property as a work of art (for example, frames it and hangs it on a wall), the service recipient would owe use tax based on their purchase price. In addition, if the property is subsequently physically incorporated into finished art for reproduction by photomechanical processes, the service recipient would owe use tax based on their purchase price.

(3) RELEASE PRINTS.

(A) The manufacturing of release prints is not the performance of qualified production services. The application of sales tax to sales of release prints is the same as the application of tax to other sales of tangible personal property; that is, the sale of a release print to a person for exhibition or broadcast is a retail sale subject to sales tax. The sale of a release print for resale is not subject to tax. See subdivision (d)(11)(A) for a list of film and tape products which are release prints.

(B) When a contract calls for production or sale of a qualified motion picture, but only requires delivery of one or more release prints, the first film or tape delivered which is of a quality suitable for exhibition will be considered the principal release print. The person required to deliver the principal release print under the contract is the consumer of, and tax applies to the sale to that person of, the principal release print. For the application of tax to all other sales of release prints, whether called for in the original contract or not, see paragraph (A) of this subdivision.

(4) STOCK SHOTS.

(A) The production of a stock shot, whether by the owner at its own facility or by a subcontractor, is a qualified production service. The person producing the stock shot is the consumer of, and tax applies to the sale to that person of, tangible personal property which such person uses to produce the stock shot. The transfer, either outright or by lease, of such stock shot by the owner of the stock shot or subcontractor is nontaxable.

(B) The outright sale of a stock shot library consisting of negative and/or positive materials is a sale subject to tax unless otherwise exempt.

(5) SPECIAL PRODUCTION PARTNERSHIPS. If two or more persons engaged in the production and distribution of motion pictures for use in any media form a partnership for the purpose of reducing the cost of producing motion pictures through the sharing of the use of equipment, studio facilities, and the services of personnel, the furnishing (without transferring title to tangible personal property) of such equipment, facilities, and services by the partnership to its members for the purpose of the production of motion pictures by its members does not constitute a "sale" or "purchase". Refer to subdivision (b)(2)(B) for the application of tax to charges for tangible personal property transferred along with the sale of qualified production services.

(6) RENTALS GENERALLY.

(A) Rentals of Equipment. Tax applies to rentals of tangible personal property as explained in Regulation 1660. A person who contracts to provide qualified production services and provides equipment, such as an editing machine or a camera, together with an operator of the equipment to perform the services, does not thereby rent out the equipment but uses the equipment in performing the qualified production services. Such person may not purchase the equipment under a resale certificate but should pay sales tax reimbursement or timely pay use tax on the purchase of the equipment.

(B) Rentals Under A Studio Facilities Contract. Under a studio facilities contract, a studio provides the use of certain property and services for a facilities fee. Included within the property made available are items of tangible personal property, the furnishing of which constitutes a rental.

In addition, billings are made for additional costs of materials and labor for sets, props and wardrobes. Such costs include the labor of persons such as carpenters, electricians, painters, plasterers, to fabricate flats, to revamp and change existing flats, and to assemble the components into a set (flats are portable components of sets and are usually prefabricated). Usually the facilities contract provides that title to these items remains in the studio. Under these circumstances, charges billed out as the cost of materials and labor are considered rentals.

In view of the difficulty of determining the amount of taxable rentals included within the facilities fee and the additional costs billed for sets, props, and wardrobes, the taxable rental so included will be deemed to be 55 percent of the actual set designing, set construction, and set striking costs billed to the lessee. The 55 percent factor covers set rentals and rentals of all other items furnished under a studio facilities contract whether charged to production cost or included as a portion of the facilities fee.

If title to any particular item is actually transferred, e.g., an item of wardrobe to an actress, the entire charge for the item is taxable.

Rentals of tangible personal property by motion picture and television studios which do not have a studio facilities contract with the lessee are taxable in the same manner as rentals generally.

Charges involving rentals of permanent standing sets, which are real property rather than personal property, are not taxable where the transactions are clearly identifiable in the lessor's records.

(C) Distribution or Rental of Motion Pictures. Rental receipts from any motion picture such as release prints or stock shots are not subject to tax. Tax applies to leases of videocassettes, videotapes, and videodiscs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the videocassette, videotape, or videodisc. (Reg. 1660, subd. (d)(2).)

(D) Rentals of Still Photographs and Photographic Slide Films. Leases of still photographs or photographic slides are subject to tax unless the lessor leases the property in substantially the same form as acquired by the lessor, or by his or her transferor, and the lessor or transferor has paid sales tax reimbursement or has timely paid use tax measured by the purchase price. (Reg. 1660, subd. (b)(1)(E).)

(c) MISCELLANEOUS.

(1) SLIDE FILMS. Still slide films and filmstrips are not motion pictures. A person who makes such films or filmstrips for customers is a retailer, and tax applies to charges made to the customers.

(d) DEFINITIONS.

(1) "ADAPT." To make suitable for a different use.

(2) "ANIMATION." A process by which the portrayal of action is created by a computer or by the recording of a series of images of drawings or models, each image representing an advancement in the action.

(3) "CUTTING SERVICES." All labor involved in cutting and splicing film, tape or other embodiment.

(4) "EXPLOIT" OR "EXPLOITATION." Any use of all or any part of a qualified motion picture, including exhibiting, broadcasting, telecasting, displaying, projecting, transmitting, duplicating, reproducing, distributing, promoting, advertising, commercializing, merchandising, marketing, in any or all media markets and territories and by any or all means, methods, modes, processes, and devices or delivery systems of every kind and character. "Exploitation" includes each and every act comprising part of any phase of the process of exploiting all or any qualified motion picture, whether before or after commencement of principal photography.

(5) "FACILITIES FEE." An amount charged by the studio to a person who works on any part of a motion picture under a studio facilities contract which entitles the person to the use of basic facilities, such as stage space, projection room, sound facilities, cutting room, dressing rooms, office space, parking, grip equipment, props, set dressings, drapes, and backings, and to services, such as accounting, budgeting, and janitors. Items provided by studios are usually divided into "below-the-line" elements and "above-the-line" elements. The term "below-the-line" includes all elements related to production other than basic format, scripts, directors, talent, and writers, (including persons such as secretaries, production or administrative assistants, and script secretaries).

(6) "MODEL." Any three dimensional representation including, but not limited to landscape or other miniatures, creatures, puppets, sculptures, or non-real life objects or structures.

(7) "MOTION PICTURE." Any audiovisual work (at any stage of the production thereof) consisting of a series of related images, either on film, tape, or other embodiment, whether photographic, or otherwise, and for these purposes, includes all physical materials comprising part of, or synchronized with, the motion picture, including the original, duplicate, and other negatives, intermediary film products, tapes, prints and original, duplicate and other sound or visual recordings created to accompany the pictorial material depicted in the motion picture.

(8) "PRODUCE OR PRODUCTION OF ANY QUALIFIED MOTION PICTURE." To originate, create, invent, design, devise, develop, photograph, edit, record, imprint, adapt, alter, make, process, fabricate, assemble, construct, or manufacture all or any part of that qualified motion picture by any means, method, or devise of any kind or character, whether before or after commencement of principal photography.

(9) "QUALIFIED MOTION PICTURE." See subdivision (b)(1).

(10) "QUALIFIED PRODUCTION SERVICES." See subdivision (b)(2).

(11) "RELEASE PRINT." A copy of a qualified motion picture complete in all respects, which is of a quality suitable for exhibition or broadcast.

(A) The following film and tape products, if complete in all respects and suitable for exhibition or broadcast, qualify as release prints:

FILM TAPE

Screening Copy (Complete)

A print used for marketing, goodwill or other promotional purposes.

Promo/Marketing Videotape

A copy used for marketing, goodwill or other promotional purposes.

Release print

A print produced on high quality stock and used for exhibition to the public.

Broadcast/Air Dub

A broadcast quality copy made from an edited or safety master.

Show Print

A high quality print used for industry screenings and major market exhibition.
 

(B) The following film and tape products are not considered release prints but rather are the product of qualified production services:

FILM TAPE

Work Print/Rush/Daily

A positive print made from a developed negative and used for editing. The negative may be the embodiment of elements including, but not limited to, original photography, leaders, opticals, intermediates, sound tracks, overlay titles, or mattes.

Master

An original tape of film action.

Fine Grain/Interpositive Master Positive

An intermediate positive film used for storing and processing images, creating visual effects or duplicate negatives for release printing or for archival or other uses.

Window Dub/Submaster

A copy of the master used for editing.

Duplicate (Dupe) Negative Internegative

A negative film produced from a fine grain or interpositive and used for producing release prints.

Edited Master

An edited copy of a sub or edited master.

Answer Print/First Trial/Composite Print

A print produced from an original or dupe negative for evaluation of color balance and used to generate an interpositive or internegative.

Safety Master/Protection Copy

A back-up copy of a sub or edited master.

YCM—(Yellow, Cyan and Magenta

A black and white fine copy of primary colors produced for archival purposes.

Work Print Videotape

An intermediate copy made from film and used for reviewing dailies, preliminary editing or network approvals.

Contrast Prints

A print manufactured on special low contrast film emulsion designed to be used for transferring a motion picture from film medium to tape.

Technical Check Videotape

A broadcast quality copy used for technical and internal review.

Stock Shot

A clip from a motion picture which has been exhibited or broadcasted to its general audience

Stock Shot

A clip from a motion picture which has been exhibited or broadcasted to its general audience

One Light Print

An untimed color positive print used for editing purposes.

Approval Copy

A copy of the director's final version which is prepared for client review.

Black and White ("Blue") Dupes

A positive print generally without sound used for various types of editing.

Viewing/Screening Videotape (Incomplete)

A non-broadcast quality copy of the finished version used for review purposes which may include visual time codes or overt anti-piracy protection or lack title or end credits.

Check Print

A print produced for purposes of checking the quality of the internegative and to assure that subsequent prints conform to the answer print.
 

Edited Work Print/ Edited Daily

A print used for internal review prior to a final version.
 

Preview Print

An edited work print which represents the director's final version as required by guild agreement.
 

Bid Print

An interim edited preview print used for evaluating market potential.
 

Screening Copy (Incomplete)

A print used for review purposes which may include visual time codes or overt anti-piracy protection or lack title or end credits.
 

Approval Copy

A preview print used for customer review purposes.
 

(12) "SETS." Artificial settings for scenes of motion pictures. They may be either of a temporary or portable nature, such as interiors, or of a permanent nature erected on real property, such as Western streets or city streets.

(13) "SPECIAL EFFECTS." A visual representation, on film, tape, or other audiovisual embodiment of illusory live action produced through photographic, electronic , mechanical, or other means, which comprises all or part of a motion picture.

(14) "TECHNOLOGICAL MODIFICATIONS." Alteration of a motion picture through computer, electromagnetic or other processes or means including color imaging and color enhancing.

(15) "CREATIVE ART SERVICES." Creative art services are services performed by persons such as advertising agencies, commercial artists and designers to convey ideas, concepts, looks or messages in connection with production, distribution or exploitation of a qualified motion picture. Creative art services may result in a transfer, enhancement or revision on any medium including, without limitation, the following: roughs, visualizations, drawings, sketches, renderings, illustrations, layouts, comprehensives, photographs, negatives, transparencies, prints, copies, chromatics, stats, logo types, scans, lasergraphics, visual prototypes and electronic imagery. Creative art services do not include services for the preparation of finished art for use in reproduction by photomechanical processes.

(16) "BUYOUT FEES." Buyout fees are amounts paid for the right to use an idea, concept, look or message previously presented during any phase of creative art services.

History: Effective August, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended by renumbering November 3, 1971, effective December 3, 1971.

Amended November 14, 1974, effective December 22, 1974. Totally revised regulation, added definitions, and added explanation and list of taxable charges to producers.

Amended October 26, 1983, effective November 17, 1983. Paragraph (e)(3) amended as an emergency regulation to provide that tax applied to leases of video cassettes, videotapes, and videodiscs for private use.

Amended November 18, 1987, effective January 1, 1988. Amended subdivisions (b)(1), (b)(19), (b)(20), (c)(2), and (d) and added subdivision (e)(4) and (f) to conform the regulation to the Revenue and Taxation Code and to reflect significant changes that have occurred in the industry over the years, e.g., increased diversification of functions and changes in contractual relationships between the parties to a production.

Amended March 6, 1990, effective May 12, 1990. Totally revised the regulation to conform it to the Revenue and Taxation Code as amended by SB 1405 (Chapter 1157, Statutes of 1988) and added subdivision (e) to provide this amendment is operative September 22, 1988.

Amended September 25, 1996, effective February 16, 1997. Added subdivision 5 to subdivision (b)(2)(D) and subdivisions (15) & (16) to subdivision (d); deleted subdivision (e).


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Regulation 1530. Foundries.

Reference: Sections 6007–6009, Revenue and Taxation Code.

Tax applies to fifty-five percent of the receipts from the sale of coke to foundries for use in the manufacture of castings by the cupola process, which percentage represents that portion of the coke that is consumed in the process. Tax does not apply to the remaining forty-five percent, which percentage represents that portion of the coke that is purchased by the foundries for resale.

History: Effective July 1, 1939.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended by renumbering November 3, 1971, effective December 3, 1971.


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Regulation 1531. Fur Dressers and Dyers.

Reference: Sections 6007–F6009, Revenue and Taxation Code.

Altering, repairing, and remodeling furs, see Regulation 1549.

Tax does not apply to sales of dyestuffs and the following chemicals to fur dressers and dyers engaged in processing and dyeing skins and furs of which they are the owners and which they will sell:

(a) Chemicals used in the pickling and tanning process:

Aluminum sulphate

Sodium chloride *

Ammonium chloride

Chrome alum

Ammonium sulphate

Potassium aluminum sulphate

Sulphuric acid

Formaldehyde

* Sodium chloride is also used in "fleshing," i.e., the process of removing the residue of the flesh from the skin, in which case it does not become a component part of the finished product. In the event that a fur dyer purchases under resale certificates sodium chloride, a portion of which he uses in fleshing, he will be required to pay sales tax on the cost of the total amount purchased, unless he keeps accurate records showing the respective amounts used in each process.

(b) Chemicals used in mordanting:

Potassium dichromate

Copper sulphate

Ferrous sulphate

Sodium dichromate

Lead acetate

Potassium tartarate

Acetic acid

Antimonium potassium tartarate

Formic acid

(c) Dyes:

Universal D

N Z A

B C A

"P" Base

Fur Brown

Fur Black

Acid Red

Acid Blue

E G

D M G—Gray

D B

Aniline Hydrochloride

Universal P S

Universal P H C L

Universal A

Universal 2 G S

Universal 2 G E

(d) Intermediates:

Hydrogen peroxide *

Potassium chlorate

Ammonium hydroxide

Ammonium chloride

Copper sulphate

Pyrogallic acid

* Hydrogen peroxide is also commonly used as a bleaching agent, in which case the person so using it is the consumer thereof, and the same comments are applicable to it as have been made above in connection with sodium chloride.

(e) Processing oils used to produce softness and flexibility:

Glycerine

Nutramented cod oil

Shellacol

Sulphonated nutracod

Sulphonate cod oil

(f) It is possible that other chemicals than those listed may be used in the above processes and may also be regarded as being purchased by fur dyers for the purpose of resale. All chemicals, however, which are not listed above and which are not used in a manner comparable to those which are listed, must be regarded as being purchased by fur dyers for their own consumption rather than for the purpose of resale.

(g) Included among the products which are commonly used by fur dressers and dyers and which should not be purchased under resale certificates are the following:

Sodium carbonate (soda ash)

Sodium sulphate (glauber salts)

Trisodium phosphate

Fibreen talc

French chalk

Sierra white talc

Chloride of lime

(h) Fur dressers and dyers sometimes process and dye furs belonging to others, as distinguished from furs which they have purchased and will resell. Unless their operations amount to producing, processing or fabricating within the meaning of Regulation 1526, they are the consumers of all products used in connection with such work, including dyestuffs and other chemicals which combine with the fur and become a component part of the finished article.

History: Effective August 1, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended and renumbered November 3, 1971, effective December 3, 1971.


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Regulation 1532. Teleproduction or Other Postproduction Service Equipment.

Reference: Section 6378, Revenue and Taxation Code.

(a) PARTIAL EXEMPTION FOR PROPERTY PURCHASED FOR USE IN TELEPRODUCTION OR OTHER POSTPRODUCTION SERVICES. Commencing on January 1, 1999, section 6378 of the Revenue and Taxation Code provides a partial exemption from sales and use tax for certain properties described in this regulation.

For the period commencing on January 1, 1999 and ending on December 31, 2000, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

Subject to the limitations set forth above, this partial exemption applies to sales or use taxes imposed on the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following items:

(1) Tangible personal property as defined in subdivision (c)(5) purchased for use by a qualified person to be used primarily in teleproduction or other postproduction services.

(2) Tangible personal property as defined in subdivision (c)(5) purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in subdivision (a)(1).

(b) PROPERTY USED PRIMARILY IN ADMINISTRATION, GENERAL MANAGEMENT, OR MARKETING. Notwithstanding any other provision of this regulation, this partial exemption shall not apply to any tangible personal property that is used primarily in administration, general management, or marketing. For purposes of this subdivision, tangible personal property is used primarily in administration, general management, or marketing when it is used 50 percent or more of the time in one or more of those activities for the one year period following the date of purchase of the property.

(c) DEFINITIONS. For purposes of this regulation:

(1) "Primarily" means tangible personal property as defined in subdivision (c)(5) of this regulation used 50 percent or more of the time in an activity described in subdivision (a) for the one-year period following the date of purchase of the property. Tangible personal property shall not be considered used in such activities for any period of time that the property is located outside the state, regardless of how the property is used while outside the state.

(2) "Qualified person" means any person whose line of business is primarily engaged in teleproduction or other postproduction activities, including postproduction audio services for film, television, and video productions, described in Code 512191 of the North American Industry Classification System (NAICS) Manual published by the United States Office of Management and Budget, 1997 edition, and as further defined in (c)(4) of this regulation. The term "qualified person" does not include persons whose line of business is primarily engaged in portrait studios providing still, video, or digital portrait photography services (NAICS Code 541921, incorporated herein by reference), or commercial photography services (NAICS Code 541922, incorporated herein by reference). For the purposes of this subdivision:

(A) "Primarily engaged" means 50 percent or more of gross revenues, including intra-company charges, are derived from teleproduction or other postproduction activities for the financial year of the purchaser preceding the purchase of the property. In cases where the purchaser was not primarily engaged in "teleproduction or other postproduction services" for the financial year preceding the purchase of the property, the one year period following the date of purchase of the property will be used. In the case of a nonprofit teleproduction or other postproduction establishment, "primarily engaged" means 50 percent or more of the funds allocated to the establishment are attributable to teleproduction or other postproduction services.

(B) For purposes of classifying a line of business, the economic unit shall be the "establishment" and the classification of the line or lines of business will be based on the establishment's primary activity based upon gross revenues.

(C) "Establishment" is defined as the smallest operating unit for which records provide information on the revenues and cost of operations incurred to perform the teleproduction or postproduction services.

1. The services may be provided to other divisions within the same entity or to related parties with or without direct compensation.

2. Establishments may include, but are not limited to, departments, divisions, subdivisions and product lines.

(3) "Sale" includes the producing, fabricating or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating or processing. When performed outside this state or when the customer issues a resale certificate, a "purchase" includes the producing, fabricating or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating or processing. If such producing, fabricating or processing is performed on property described in subdivision (a)(1) or (a)(2) of this regulation for a qualified person and the other requirements for the partial exemption in this regulation are met, the partial exemption applies to the gross receipts or sales price for such producing, fabricating, or processing.

(4) "Teleproduction or other postproduction services" means services for film, video, or digital multimedia formats (audio or visual) that include editing, film and video transfers, transcoding, dubbing, subtitling, credits, close captioning, audio production, special effects (visual or sound), graphics, or animation. For the purposes of this regulation, "teleproduction or other postproduction services" includes postproduction services and does not include production services or activities. "Teleproduction or other postproduction services" include the duplicating of film for postproduction purposes. However, the duplication of film to make release prints does not qualify as a "teleproduction or other postproduction service."

The term "teleproduction or other postproduction services" also includes, but is not limited to:

(A) Services performed to transform, manipulate, assemble, and duplicate visual moving images and synchronous sound previously captured on film, video, or digital formats (audio or visual) or as data during principal photography.

(B) Services to create digital images, models, miniatures or sounds that may be, but are not required to be combined with live action images. Teleproduction or other postproduction services does not include the recording of music except music recorded with synchronous visual images.

(C) Film processing; film to tape transfers; tape to tape transfers; DVD or digital audiovisual multimedia format authoring and encoding; color correction; digitizing; on-line and off-line editing; negative cutting; assembling; animation, creating 2d images, creating 3d images (CGI), visual effects; compositing; digital video image manipulation; dirt fixes; motion control visual effects capture; scanning and recording to or from film, video or data; transform; standards or format conversion; transcoding; duplication (except as provided); titles; subtitling; credits; closed captioning; creating graphics; audio scoring; automated dialogue replacement; foley; audio mixing; audio editing; audio laybacks; audio laydowns; audio special effects; management of visual or audio assets and related files stored as data; film, video or audio (dialogue, music and effects) restoration and preservation; archiving, format transfer utilizing compression standards; film cleaning; quality control processes performed in conjunction with any other postproduction process; and creation of data files related to a service defined above.

Definitions of the terms used in this subdivision are provided in Appendix C.

(D) The providing of postproduction facilities, such as personnel and scoring stages or equipment where the provider is deemed to be providing a qualified teleproduction or other postproduction service, is not a lease of tangible personal property.

The providing of special configured equipment to be used in (A) through (D) above with 24 hour a day, 7-day a week available on site technical support where the provider is deemed to be providing a qualified teleproduction or other postproduction service, is not a lease of tangible personal property.

(5) "Tangible personal property" includes, but is not limited to, all of the following:

(A) Machinery and Equipment, Including Component Parts. Machinery and equipment includes, but is not limited to, duplication equipment used for postproduction purposes and any property used to provide teleproduction or other postproduction services that is mounted or installed in a vehicle.

(B) All equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, without limitation, audio and visual monitoring equipment, scopes, computers, data processing equipment, electronic data storage equipment, including both internal and external devices, consoles which are custom built, which have open compartments in which tangible personal property described in subdivisions (a)(1) and (a)(2) is placed and which are not suitable for use for other purposes, equipment racks and computer software, including both operating programs and application programs. This also includes 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 taxpayer or another party. Repair and replacement parts that are treated as a depreciable asset for financial purposes will be treated as having a useful life of more than one year for the purposes of this regulation, even when such items are expensed for income tax purposes under the special provisions of Internal Revenue Code section 179.

(C) Materials (as defined in Regulation 1521), only when purchased by a qualified person as tangible personal property and not pursuant to a construction contract, unless the construction contractor is the retailer of materials under Regulation 1521(b)(2)(A)(2); fixtures; or other tangible personal property used to operate, control, regulate, or maintain the property described in subdivisions (a)(1) and (a)(2) which may subsequently be incorporated into real property, including but not limited to items such as air conditioning units dedicated to cooling equipment, electrical UPS (uninterrupted power source) units, sub-flooring, specialized lighting, sound insulation, hydraulics, cabling, routers, patch bays, hubs, robotic storage and retrieval equipment, switchers, satellite and/or other telecommunications equipment used to facilitate the distribution or movement of elements (in either video or data form) between all the various parties collaborating in the completion of a film or video project as part of the postproduction process.

(6) "Tangible personal property" does not include any of the following:

(A) Furniture, inventory, meals, vehicles (including those in or on which qualifying property is mounted or installed,) or equipment used to store products. The term "furniture" includes, but is not limited to, tables, chairs, desks or consoles other than those described in subdivision (c)(5)(B).

(B) Real property.

(d) TAXES AS TO WHICH THE PARTIAL EXEMPTION DOES NOT APPLY. This partial exemption does not apply to any tax levied by a county, city, or district pursuant to, or in accordance with, either the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code §§ 7200 et seq.) or the Transactions and Use Tax Law (Rev. & Tax Code §§ 7251 et seq.).

This partial exemption also does not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution.

(e) SECTION 6378 EXEMPTION CERTIFICATE.

(1) Qualified persons who purchase or lease tangible personal property from an in-state seller, or an out-of-state seller obligated to collect use tax, must provide the seller with a section 6378 exemption certificate in order for the seller to claim the partial exemption. If the seller takes a complete section 6378 exemption certificate timely and in good faith, the certificate relieves the seller from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A certificate will be considered timely if it is taken any time before the seller bills the purchaser for the property, any time within the seller's normal billing or payment cycle, or any time at or prior to delivery of the property to the purchaser.

A section 6378 exemption certificate which is not taken timely will not relieve the seller of the liability for tax excluded by the partial exemption unless the seller presents satisfactory evidence to the Board that the specific property was sold to a qualified person and primarily used in a qualifying manner.

The exemption certificate form set forth in Appendix A may be used as an exemption certificate.

(2) BLANKET CERTIFICATES. In lieu of requiring an exemption certificate for each transaction, a qualified person may issue a blanket exemption certificate. The blanket exemption certificate form set forth in Appendix B may be used as an exemption certificate. Qualified persons claiming the partial exemption through a blanket exemption certificate must make a clear reference to the blanket exemption certificate in documents such as their written purchase orders, sales agreements, leases, or contracts. Qualified persons claiming the partial exemption must also include in the document referencing the blanket exemption certificate a description of the property.

(3) FORM OF CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as an exemption certificate with respect to the sale of the property described in the document if it contains all of the following essential elements:

(A) The signature of the purchaser or an agent or employee of the purchaser.

(B) The name and address of the purchaser.

(C) The seller's permit number held by the purchaser, or a notation to the effect that the purchaser is not required to hold a permit.

(D) A statement that the property acquired is to be used primarily in teleproduction or other postproduction services or to be used primarily to maintain, repair, measure, or test any such property.

(E) A statement that the purchaser is a qualified person primarily engaged in teleproduction or other postproduction services as described in Regulation 1532.

(F) Description of property purchased, including sales price or rentals payable.

(G) Date executed.

(4) RETENTION AND AVAILABILITY OF CERTIFICATES. A seller must retain each exemption certificate, including a blanket exemption certificate, received from a qualified person for a period of not less than four years from the date on which the seller claims a partial exemption based on the exemption certificate. If a qualified person issues a blanket exemption certificate, the seller must also retain all documents, such as purchase orders, sales agreements, lease agreements, or contracts referencing the blanket exemption certificate and all invoices containing the sales price of the property that the qualified person claims is partially exempt by reference to the blanket exemption certificate. Such documents shall be retained for a period of not less than four years from the date on which the seller claims a partial exemption based on the reference to the blanket exemption certificate.

While the Board will not normally require the filing of the section 6378 exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may, on 30 days' written notice, require a seller to commence filing with its sales and use tax returns copies of all certificates. The Board may also require that, within 45 days of the Board's request, sellers furnish to the Board any and all exemption certificates, or copies thereof, accepted for the purpose of supporting the partial exemption.

(5) If a purchaser who issues a section 6378 exemption certificate pursuant to subdivision (e)(1), (2), or (3) subsequently does not meet the requirements of a qualified person as set forth in subdivision (c)(2) or does not use the property in a manner or for the purpose which entitles the purchaser to the partial exemption, or if a purchaser issues a section 6378 exemption certificate pursuant to subdivision (e)(1), (2), or (3) for property that does not qualify for the partial exemption, the purchaser shall be liable for payment of the sales tax excluded by the partial exemption, with applicable interest, to the same extent as if the purchaser were a seller making a retail sale of the property at the time of conversion. The sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale.

(f) USE TAX. With respect to tangible personal property the use of which is subject to use tax, any purchaser claiming the partial exemption pursuant to section 6378 of the Revenue and Taxation Code must file a sales and use tax return or consumer use tax return for the period in which the property is first stored, used, or consumed in California unless the seller holds a valid California seller's permit or a certificate of registration—use tax and collects the use tax. The purchaser will not be relieved of his or her liability to pay any applicable use tax that is excluded from the partial exemption as provided in subdivision (d) of this regulation until such tax is remitted either to a vendor who issues a receipt which meets the requirements of Regulation 1686 or directly to the Board.

(g) CONVERSION OF PROPERTY TO A USE NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Property that, within one year from the date of purchase, is removed from California, converted from an exempt use under this regulation to some other use not qualifying for the partial exemption, or used in a manner not qualifying for the partial exemption under this regulation, such as a lease to a non-qualified person, is used in a non-qualifying manner. If, as a result of the total non-qualifying use, the property is not primarily used, as defined in subdivision (c)(1), in a qualifying activity, the partial exemption shall not apply. In determining the non-qualifying use, two or more non-qualifying uses that occur at the same time shall be counted as one. For example, a lease to a non-qualified person of property that is removed from California shall be considered as one non-qualifying use for the period it was removed from California and leased to a non-qualified person.

The property shall not, however, be regarded as converted to a use not qualifying for the partial exemption if the qualified person sells or leases the property to a qualified person for qualified use in California.

For purposes of this subdivision, tangible personal property shall not be regarded as being converted to a non-qualifying use if such property is used for teleproduction or other postproduction services in this state for more than one half of the one year period from the date of purchase of the property.

(h) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX. If a purchaser submits a section 6378 exemption certificate to the seller, and then within one year of the date of purchase of the property converts that property as described in subdivision (g) from an exempt use pursuant to this regulation to some other use not qualifying for the partial exemption, the purchaser shall be liable for payment of sales tax excluded by the partial exemption, with applicable interest, to the same extent as if the purchaser were a seller making a retail sale of the property at the time the property was so removed, converted, or used; and the sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale. In the case of a non-qualifying lease, the payment of sales tax by a purchaser when included on the return for the period covering the date of conversion shall be deemed to be a timely election to pay tax based on the purchase price.

(i) LEASES.

(1) LEASES—IN GENERAL. Leases of tangible personal property which are classified as "continuing sales" and "continuing purchases" of tangible personal property, in accordance with Regulation 1660, "Leases of Tangible Personal Property—In General," may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rental receipts paid by a qualified person with respect to a lease of tangible personal property to the qualified person, which tangible personal property is used as set forth in subdivisions (a)(1) and (a)(2) of this regulation, notwithstanding the fact that the lease was entered into prior to the operative date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption.

A lessee is a qualified person if the lessee is "primarily engaged" in teleproduction or other postproduction activities and meets the requirements of a qualified person set forth in subdivision (c)(2).

(2) LEASES OF TAX-PAID PROPERTY. The partial exemption does not apply to the sale of property to, or the storage, use, or other consumption of property by, a person who is not a qualified person even if that person subsequently leases the property to a qualified person.

(3) LEASE OF PROPERTY BY A QUALIFIED PERSON. If a qualified person has acquired property subject to the partial exemption provided by this regulation, the subsequent lease of that property will not be subject to tax measured by rental receipts. A lease of property to a qualified person for use in a qualified manner constitutes a qualifying use of the property by the lessor. If, however, the property is used in a manner not qualifying for the exemption, such as being leased to a non-qualified person in the aggregate for more than one half of the one year period following the date of purchase by the qualified person, such property is not considered to be primarily used in "teleproduction or other postproduction services." Therefore, the lessor will be liable for tax in accordance with subdivision (e)(5).

For example, if a qualified person purchases property under the partial exemption, and then leases the property to a non-qualified person, the lease receipts will not be subject to tax as the purchaser has elected to pay tax on their cost. However, if the qualified person who purchases the property leases the property to a non-qualified person for more than one half of the one year period following the date of purchase, the lessor is not using the property in a qualifying manner and is responsible for the tax excluded by the partial exemption based upon the purchase price of the property.

(4) LEASES—RECHARACTERIZATION. With respect to transactions which the parties denominate as a "lease," but which are recharacterized for sales and use tax purposes either as sales at their inception, pursuant to Regulation 1641, "Credit Sales and Repossessions," subdivision (b), or as sales under a security agreement, Regulation 1660, "Leases of Tangible Personal Property—In General," subdivision (a)(2), the transactions may qualify for the partial exemption, in accordance with this regulation.

(5) LEASES—ACQUISITION SALE AND LEASEBACK. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.

(j) RECORDS. Adequate and complete records must be maintained by the purchaser to support that the property purchased was used primarily in the performance of teleproduction or other postproduction services for a period of no less than one year prior to conversion of the property to a non-qualifying use or use by a non qualifying party.

(k) OPERATIVE DATE. This regulation is operative as of January 1, 1999. The partial exemption under section 6378 of the Revenue and Taxation Code only applies to qualifying tangible personal property that is sold or first stored, used, or consumed in California on or after the operative date.

History: Adopted October 6, 1999, effective January 8, 2000.

Amended December 14, 2000, effective February 13, 2001. Subdivision (a) and Appendices (A) and (B)—incorporated new tax rate of 4.75% effective January 1, 2001, in first paragraphs.

Amended October 29, 2001, effective May 17, 2002. Subdivision (a), second unnumbered paragraph—phrase "and ending on December 31, 2001" added. New third unnumbered paragraph added. Appendices (A) and (B)
—incorporated new tax rate of 5.0% effective January 1, 2002, in first paragraphs.

Amended August 24, 2004, effective November 12, 2004. Subdivision (a)—in 3rd unnumbered paragraph added phrase "and ending on June 30, 2004," added new fourth unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004. Appendices A and B—incorporated new tax rate of 5.25% effective July 1, 2004 in first paragraph. Deleted the word "their" and replaced with "his or her" to the sentence under the purchaser's information box.

Amended April 15, 2009, effective June 4, 2009. Amended subdivision (a), Appendix A, and Appendix B to reflect the increase in the partial exemption rate to 6.25% from April 1, 2009, until Revenue and Taxation Code sections 6051.7 and 6201.7 cease to be operative.


Section 6378 Exemption Certificate

Please Note: This is a partial exemption from sales and use tax at the rate of 6.25% effective April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, 5.25% from July 1, 2004 to March 31, 2009, 5% from January 1, 2002 to June 30, 2004, 4.75% from January 1, 2001 to December 31, 2001, and 5% from January 1, 1999 to December 31, 2000. You are not relieved from your obligations for the local and district taxes on this transaction. This partial exemption also does not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution. The exemption is specific to these transactions only and may not be construed to exempt other transactions. This exemption also applies to lease payments made on or after January 1, 1999, notwithstanding the fact that the lease agreement was entered into prior to January 1, 1999. This certificate may not be used to purchase certain property such as, furniture, inventory, meals, vehicles, equipment used to store products or real property.


Seller's Name
 
Seller's Address (Street, City, State, Zip Code)
 


PURCHASE ORDER NUMBER DATE OF PURCHASE ORDER DESCRIPTION OF PROPERTY PURCHASED OR LEASED* SALES PRICE/RENTALS PAYABLE
       
       
       
       
       


I hereby certify that I am a qualified person primarily engaged in teleproduction or other postproduction services as described in Regulation 1532 and that the property listed above will be used primarily in teleproduction or other postproduction services or to maintain, repair, measure or test any such property. I understand that if such property is used outside the State of California or leased to a non-qualified person in the aggregate for more than one half of the one year period following the date of purchase or lease, or if such property is converted for use in a manner not qualifying for the exemption, that I am required by the Revenue and Taxation Code to report and pay the state sales/use tax measured by the sales price of the property to/by me.


PRINT NAME DATE COMPANY NAME
PRINT NAME DATE COMPANY NAME
PRINT NAME DATE COMPANY NAME

Seller must retain a copy of this exemption certificate to support a deduction taken on their return.

* A seller's permit is required to be held by any person engaged in the business of selling tangible personal property in California. Certain lessors must also hold a seller's permit. If you are not required to hold a seller's permit because you make no sales or leases of tangible personal property in California, please enter "Not Applicable".

Appendix A

Section 6378 Blanket Exemption Certificate

Please Note: This is a partial exemption from sales and use tax at the rate of 6.25% effective April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, 5.25% from July 1, 2004 to March 31, 2009, 5% from January 1, 2002 to June 30, 2004, 4.75% from January 1, 2001 to December 31, 2001, and 5% from January 1, 1999 to December 31, 2000. You are not relieved from your obligations for the local and district taxes on this transaction. This partial exemption also does not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution. This exemption also applies to lease payments made on or after January 1, 1999, notwithstanding the fact that the lease agreement was entered into prior to January 1, 1999. This certificate may not be used to purchase certain property such as furniture, inventory, meals, vehicles, equipment used to store products or real property.


Seller's Name
 
Seller's Address (Street, City, State, Zip Code)
 


I hereby certify that I am a qualified person primarily engaged in teleproduction or other postproduction services as described in Regulation 1532 and that the property purchased or leased will be used primarily in teleproduction or other postproduction services or to maintain, repair, measure or test any such property. I understand that if such property is used outside the State of California or leased to a non qualified person in the aggregate for more than one half of the one year period following the date of purchase or lease, or if such property is converted for use in a manner not qualifying for the exemption, that I am required by the Revenue and Taxation Code to report and pay the state sales/use tax measured by the sales price of the property to/by me.


PRINT NAME DATE COMPANY NAME
PRINT NAME DATE COMPANY NAME
PRINT NAME DATE COMPANY NAME


Seller must retain a copy of this exemption certificate to support a deduction taken on their return.

* A seller's permit is required to be held by any person engaged in the business of selling tangible personal property in California. Certain lessors must also hold a seller's permit. If you are not required to hold a seller's permit because you make no sales or leases of tangible personal property in California, please enter "Not Applicable".

Appendix B

Technical Definitions

DVD (Digital Video Disk) - is a medium for recording compressed audio, visual images and other related data.

Digitizing - Process of converting video containing audio, visual images and other related data into digital format.

Assembly - Combining audio, visual images and other related data into proper sequence and recording to a new edited master videotape pursuant to instructions provided by editor.

Creating 2D Images - Process of enhancing original elements captured through principal photography by creating or manipulating two dimensional images.

Creating 3D Images (CGI) - Process of creating three-dimensional images that will ultimately be recorded on film, video or other multimedia format.

Dirt Fixes - Process to electronically "clean up" or "remove" undesirable elements such as dirt and film scratches from visual images.

Digital Video Image Manipulation - This process includes: compositing multiple layers of visual images, changing aspect ratio or scale, flip, defocus, rotate, resize, reposition, crop, color correction, apply special effects such as warping the image, create transitional effects between scenes or shots.

Motion Control Visual Effects Capture - Recording flat art such as pictures and logos and applying movement to the visual image such as pan, scan, zoom. Motion Control Capture could also create tracking points through recording movement of a live subject that will be applied to a computer generated image.

Transcoding - Converting video and audio formats.

Duplication - Process of making film or videotape copies excluding film processing to produce release prints as defined in Regulation 1529 or duplication of video tapes intended for non-broadcast consumer sale or rental.

Automated Dialogue Replacement (ADR) - Recording new dialogue or re-recording dialogue where the production sound is unusable or obscured.

Foley - Process of adding to or replacing sound elements that enhance ambient sounds such as footsteps, doors closing, breathing, rustling of clothes, keys jangling in pockets and punches.

Audio Laybacks - Recording the completed audio back to a videotape or film master.

Audio Laydowns - Recording sound from an audio source or video element to another audio element.

Quality Control (QC) - Process by which a film print or videotape is evaluated to make sure it meets technical requirements.

Archiving - Processes involved in preparing and storing film, videotape or other multimedia elements for future use.

Format Transfer Utilizing Compression Standards - To transfer video or audio format utilizing a compression standard to allow for more efficient file size management or file format changes.

Management of Visual or Audio Assets and Related Files Stored as Data - Process of creating database with specified reference points to allow for timely search and retrieval of elements by multiple users through central file servers.

Creation of Data Files Related to a Teleproduction or other Postproduction Service - Data files contain information that is related to the visual and audio information stored on film, video or other multimedia format such as timecode, keycode/flex files, edit decision lists.

Appendix C


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Regulation 1533. Liquefied Petroleum Gas.

Reference: Section 6353, Revenue and Taxation Code.

(a) GENERAL. Commencing on and after September 1, 2001, Section 6353(b) of the Revenue and Taxation Code exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of qualified LPG used by a qualified person in an agricultural activity, or used in a qualified residence for a household activity. The terms "qualified LPG," "qualified person," "agricultural activity," "qualified residence," and "household activity" are defined below.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Agricultural activity" means the producing and harvesting of agricultural products as defined in subdivision (b)(4), by a qualified person as defined in subdivision (b)(5).

(2) "Household activity" means those activities normally undertaken in a qualified residence as defined in subdivision (b)(7), such as cooking, heating and lighting.

(3) "Person that assists a qualified person" means a person employed by a qualified person, or engaged on a contract or fee basis to perform activities described in Major Group 07 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual) which include soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services, that uses qualified LPG in assisting a person engaged in a line of business described in subdivision (b)(5). A person that assists a qualified person may perform a construction contract only if the person performing the contract is engaged in farm management services as described in Code 0762 of the SIC Manual and the construction is integral to the producing and harvesting of an agricultural product as defined in (b)(4). A person that assists a qualified person must provide physical aid or assistance in the actual producing and harvesting of agricultural products owned by the qualified person and not merely provide aid in administrative, managerial, or marketing activities. A person that assists a qualified person does not include persons performing services such as an attorney, accountant, consultant, or other similar activity. Except as otherwise provided above, a person that assists a qualified person also does not include persons who perform construction contracts or who perform repairs to farm equipment and machinery, or a person who assists such persons.

(4) "Producing and harvesting agricultural products" means those activities described in Major Groups 01, 02 and 07 of the SIC Manual. Major Group 01 includes establishments engaged in the production of crops, plants, vines, and trees (excluding forestry operations). This major group also includes establishments engaged in the operation of sod farms; in the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and in the growing of hydroponic crops. Major Group 02 includes establishments engaged in the keeping, grazing, or feeding of livestock for the sale of livestock or livestock products (including serums), for livestock increase, or for value increase. Livestock, as specified in Major Group 02, includes cattle, hogs, sheep, goats, and poultry of all kinds; also included are animal specialties, such as horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. Major Group 07 includes establishments engaged in performing soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services. Producing and harvesting agricultural products involves the cultivation of land or the growing, raising, or gathering of the commodities described in Codes 0111 to 0291 of the SIC Manual and integral activities thereto described in Codes 0711 to 0783 of the SIC Manual. Such activities include, but are not limited to, flame weeding, pest control, nut hulling and shelling, crop drying, cotton ginning, poultry and pig brooding, livestock breeding, water heating, crop heating, and fruit ripening. Producing and harvesting agricultural products also includes the washing of agricultural products, the inspection and grading of agricultural products or livestock, or the packaging of agricultural products for shipment. Except as otherwise provided under Major Groups 01, 02 or 07 of the SIC Manual, producing and harvesting activities do not include post harvesting activities nor those activities described or otherwise designated in Major Group 20—Food and Kindred Products of the SIC Manual. Nevertheless, the specific activities of sun drying or artificially dehydrating fruits and vegetables as described in Code 2034 of the SIC Manual qualify as producing and harvesting activities where those activities are performed by a qualified person as defined in (b)(5) or a person who assists a qualified person as defined in (b)(3).

Example A: Grower A farms raisins and uses qualified LPG to dry Grower A's raisins. Grower A is a qualified person (Code 0172 of the SIC Manual) and uses qualified LPG in the producing and harvesting of an agricultural commodity. The sale of qualified LPG to Grower A for use in this activity is exempt from tax.

Example B: Grower B farms plums and contracts with ABC, Inc. to dry the plums owned by Grower B in preparation for sale. ABC, Inc. uses qualified LPG to dry the plums. ABC, Inc. is a person assisting a qualified person (Code 0723 of the SIC Manual) such that the sale of qualified LPG to ABC for use in this activity is exempt from tax.

Example C: Grower C farms corn. Grower C sells the "wet" corn to a food processor based on the net dry weight of the product. The food processor uses qualified LPG to dry the corn. The food processor's use of qualified LPG to dry the commodity is not a qualified use since the food processor owns the commodity and thereby only performs a non-qualified, post harvesting activity. The sale of qualified LPG to the food processor for use in this activity is not exempt from tax.

(5) "Qualified person" means a person who purchases qualified LPG that is engaged in a line of business described in Codes 0111 to 0291 of the SIC Manual or performs activities described in Codes 0711 to 0783 in addition to being engaged in a line of business described in Codes 0111 to 0291, which includes cash grains, field crops, vegetables and melons, fruits and tree nuts, horticultural specialties, livestock, dairy, poultry and eggs, and animal specialties and who sells such commodities to others. A qualified person also includes any person conducting activities, as defined in subdivision (b)(3), that uses qualified LPG to assist a person engaged in a line of business described herein in producing and harvesting agricultural products owned by the qualified person. A qualified person is not required to be engaged 50 percent or more of the time in a line of business described in Codes 0111 to 0291. A qualified person does not include a person operating a garden plot, orchard, or farm for the purpose of growing produce or animals for that person's own use.

(6) "Qualified LPG" means liquefied petroleum gas delivered into a tank with a storage capacity that is equal to or greater than 30 gallons. Liquefied petroleum gas is a mixture of light hydrocarbons which are gaseous at atmospheric temperature and pressure. Liquefied petroleum gas occurs naturally in crude oil and natural gas production fields and is also produced in the oil refining process. Its main components are Propane (C3H8) at a boiling point of -42.07° and Butane (C4H10) at a boiling point of 0°. Delivery into tanks smaller than 30 gallons do not qualify for the exemption even if the total delivery exceeds 30 gallons.

(7) "Qualified residence" means a primary residence not serviced by gas mains and pipes, to which qualified LPG is delivered by a seller. A primary residence means a person's domicile where that person spends the greatest portion of his or her time during a calendar year. A person may change his or her primary residence only when that person moves from and otherwise abandons his or her previous residence and has no intent to return to that previous residence. In no event shall a primary residence include multiple residences maintained simultaneously such as a second, or vacation home.

Solely for purposes of this regulation, a qualified residence also includes a residence where qualified LPG is purchased by a qualified person for use in a household activity at the primary residence of:

(A) A person that assists a qualified person; or

(B) An employee of a qualified person where such person that assists a qualified person or employee of a qualified person performs an agricultural service described in Codes 0711 to 0783 of the SIC Manual for the qualified person. In addition, solely for purposes of this regulation, a qualified residence includes a residence where qualified LPG is purchased by a landlord or management company on behalf of a renter or tenant for use in a household activity at the primary residence of the renter or tenant.

(c) EXEMPTION CERTIFICATES.

(1) IN GENERAL. A person who purchases qualified LPG for use in an agricultural or household activity from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must provide the retailer with an exemption certificate in order for the retailer to claim the exemption. If the retailer takes an exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a purchaser, the exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. An exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified LPG, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified LPG to the purchaser, or no later than 15 days after the date of purchase. An exemption certificate which is not taken timely will not relieve the retailer of the tax liability; however the retailer may present satisfactory evidence to the Board that the retailer sold the qualified LPG to a purchaser for use in an agricultural or household activity. An exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the exemption on its sales and use tax return for the reporting period during which the transaction subject to the exemption occurred. Where the retailer fails to claim the exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e).

The exemption certificate form set forth in Appendix A may be used to claim the exemption.

(2) BLANKET EXEMPTION CERTIFICATES. In lieu of requiring an exemption certificate for each transaction, a person who purchases qualified LPG for use in an agricultural or household activity may issue a blanket exemption certificate. The exemption certificate form set forth in Appendix A may be used as a blanket exemption certificate. Appendix A may also be used as a specific exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. A person who purchases qualified LPG for use in an agricultural or household activity must include in the exemption certificate how much or what percentage of the qualified LPG will be used in the agricultural or household activity. If purchasing liquefied petroleum gas not qualifying for the exemption, the purchaser must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket exemption certificate.

(3) FORM OF EXEMPTION CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as an exemption certificate with respect to the sale or purchase of the liquefied petroleum gas if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. Except as otherwise provided in subdivision (b)(7), if the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.

(D) A statement that:

1. Of the liquefied petroleum gas purchased, how much or what percentage will be delivered by the seller into a tank with a storage capacity equal to or greater than 30 gallons for use in a household activity at the primary residence, which is not serviced by gas mains and pipes, of:

a. The purchaser;

b. A person described in Codes 0711 to 0783 of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, that assists a person engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual ("qualified person") or an employee of a qualified person where the LPG is purchased by such qualified person on behalf of the person that assists that qualified person in producing and harvesting agricultural products or on behalf of the employee that assists a qualified person in producing and harvesting agricultural products; or

c. A renter or tenant where the LPG is purchased by a landlord or management company on behalf of the renter or tenant.

2. Of the liquefied petroleum gas purchased, how much or what percentage will be delivered into a tank with a storage capacity equal to or greater than 30 gallons for use in producing and harvesting agricultural products, and will be purchased by:

a. A person engaged in an agricultural business described in Codes 0111 to 0291 of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, ("qualified person");

b. A person described in Codes 0711 to 0783 of the SIC Manual, that assists a qualified person; or

c. An employee of a qualified person.

(E) Date of execution of document.

(4) RETENTION AND AVAILABILITY OF EXEMPTION CERTIFICATES.
A retailer must retain each exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims an exemption based on the exemption certificate.

While the Board will not normally require the filing of the exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all exemption certificates, or copies thereof, accepted for the purposes of supporting the exemption.

(5) GOOD FAITH. A seller will be presumed to have taken an exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept an exemption certificate in good faith where the purchaser states that the qualified LPG will be used in a qualified residence for a household activity or in which a qualified person states that the qualified LPG will be used for an agricultural activity. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the LPG is not subject to an exemption, will not be otherwise used in an exempt manner, or where a person is not a qualified person when purchasing qualified LPG for an agricultural activity.

(d) EXEMPTION CERTIFICATE FOR USE TAX. The exemption certificate must be completed by a purchaser to claim an exemption from use tax on purchases of qualified LPG for use in an agricultural or household activity from an out-of-state retailer not obligated to collect the use tax. An exemption from the use tax shall not be allowed unless the purchaser or retailer claims the exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the exemption occurred. Where the purchaser or retailer fails to claim the exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e).

The purchaser who files an individual use tax return must attach a completed exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed exemption.

The exemption certificate form set forth in Appendix A may be used to claim the exemption.

(e) REFUND OF TAX.

(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a purchaser may claim the exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with an exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a qualified purchaser of qualified LPG or, at the purchaser's sole option, the purchaser may be credited with such amount.

(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the exemption as provided by this regulation may file a claim for refund equal to the amount of the exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a purchaser filing a claim for refund of the exemption has the burden of establishing that he or she was entitled to claim the exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the exemption has the burden of establishing that the purchaser of qualified LPG for use in an agricultural or household activity otherwise met all the requirements of a qualified sale at the time of the purchase subject to the refund claimed under this part.

(f) IMPROPER USE OF EXEMPTION.

(1) PROPERTY USED OR DELIVERED IN A MANNER NOT QUALIFYING FOR THE EXEMPTION. Tax applies to any sale of, and the storage, use, or other consumption in this state of liquefied petroleum gas that is used or delivered in a manner not qualifying for the exemption under this regulation.

(2) PURCHASES BY NON-QUALIFIED PERSONS. Tax applies to any sale of, and the storage, use, or other consumption in this state of qualified LPG for use in an agricultural activity if the purchaser is not a qualified person.

(g) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX.

(1) If a purchaser timely submits a copy of an exemption certificate to the retailer or exemption certificate for use tax to the Board, and then uses or takes delivery of the liquefied petroleum gas in a manner not qualifying for the exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the liquefied petroleum gas at the time the liquefied petroleum gas was so removed, converted, or used.

(2) A purchaser providing an exemption certificate accepted in good faith by the retailer or an exemption certificate for use tax to the Board for liquefied petroleum gas that does not qualify for the exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the liquefied petroleum gas at the time the liquefied petroleum gas was purchased.

(h) RECORDS. Adequate and complete records must be maintained by the purchaser as evidence that the qualified LPG purchased was used in an agricultural or household activity.

(i) EFFECTIVE DATE. This regulation is effective as of September 1, 2001.

History: Adopted March 27, 2002, operative September 1, 2001.

Exemption Certificate; Qualified Sales and Purchases of Liquefied Petroleum Gas (LPG)


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Regulation 1533.1. Farm Equipment and Machinery.

Reference: Section 6356.5, Revenue and Taxation Code.

(a) GENERAL. Commencing on and after September 1, 2001, Section 6356.5 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of farm equipment and machinery, and parts of farm equipment and machinery purchased for use by a qualified person to be used primarily in producing and harvesting agricultural products. The terms "farm equipment and machinery," "parts of farm equipment and machinery," "qualified person," and "producing and harvesting agricultural products" are defined below.

For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by Sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Farm equipment and machinery" means implements of husbandry, which include:

(A) Any new or used tool, machine, equipment, appliance, device or apparatus used in the conduct of agricultural operations, except where such items are intended for sale in the ordinary course of business. Such items include, but are not limited to, combines, harrows, tractor implements, agricultural heating and cooling equipment, fuel storage equipment, wind machines, handling and packing equipment and conveyors, ginning equipment, feeding, watering and waste disposal systems for livestock, incubators and equipment used for egg and poultry production, harvesting trays and bins, farm tools such as rakes and hoes, plant support equipment such as trellis systems, irrigation systems, fencing systems, milking systems, agricultural operating structures, squeeze chutes, portable panels, corrals, loading chutes, veterinary instruments, free stalls, cages and tack items such as saddles and rope. Farm equipment and machinery also includes any equipment or device used or required to operate, control, or regulate machinery not limited to computers, data processing equipment, and computer software, including both operating programs and application programs. Farm equipment and machinery may be attached to realty.

Agricultural operating structures include single purpose agricultural or horticultural structures as defined in Treasury Regulation 1.48–10 (26 CFR 1.48–10). Such structures must be specifically designed and constructed for the permitted purposes of housing, raising and feeding of livestock or the commercial production of plants. A structure is specifically designed and constructed if it is not economic to design and construct the structure for the intended qualifying purpose and then use the structure for a different purpose. A structure qualifies as single purpose agricultural or horticultural structure only if it is used exclusively for a permitted purpose. The structure may not be used for any nonpermissible purposes such as processing, marketing, or more than incidental use for storing feed and equipment. A single purpose agricultural structure also houses equipment necessary to house, raise and feed livestock including, but not limited to, equipment necessary to contain livestock, to provide them with feed or water, and to control the temperature, lighting, and humidity of the interior structure. Examples of structures that qualify as a single purpose agricultural or horticultural structure include, but are not limited to, a farrowing barn, greenhouse, free stall barn, milking parlor, and egg production or poultry brooding facility. Single purpose agricultural or horticultural structures do not include general purpose farm buildings.

Farm equipment and machinery does not include tangible personal property primarily used in the administration, management, or marketing of a qualified person's operations or that of another who assists a qualified person. Farm equipment and machinery also does not include tangible personal property that is, without limitation, a supply item not used in producing or harvesting agricultural products such as shop towels, cleaning agents, hand cleaners, chemicals, and articles of clothing, except clothing designed primarily to protect a commodity or to apply agricultural chemicals as described in 3 CCR 6738.

(B) Any new or used vehicle, as defined in Chapter 1, Division 16 of the Vehicle Code, which is used exclusively in the conduct of agricultural operations such as a farm tractor, but not including a vehicle whose existing design is primarily for the transportation of persons or property on a highway, unless such vehicle is otherwise specified as an implement of husbandry in some other provision of the Vehicle Code.

A list of typical vehicles regarded as farm equipment and machinery is set forth in Appendix A.

(2) "Parts of farm equipment and machinery" means:

(A) All component parts and contrivances such as belts, shafts, pipes, hoses and moving parts, that are parts of farm equipment and machinery as defined in subdivision (b)(1) which can be separated from the farm equipment and machinery and replaced. Parts of farm equipment and machinery do not include items that are consumed (e.g., burned, evaporate, dissolve, dissipate) through the regular use of the farm equipment and machinery (e.g., gasoline, cleaning agents, solutions, chemicals) which are ordinarily supplies; however, engine oil not consumed (i.e., not consumed as part of fuel for a two-stroke engine) is regarded as a component part.

(B) All repair and replacement parts for farm equipment and machinery as defined in subdivision (b)(1), which replace previous parts and can include parts that are identical to the parts they replace as well as parts that are different from the ones they replace, such as replacement parts added for the purpose of improving or modifying the farm equipment and machinery, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by a qualified person, a person that assists a qualified person, or another person.

(3) "Person that assists a qualified person" means a person employed by a qualified person, or engaged on a contract or fee basis to perform activities described in Major Group 07 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual) which include soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services, that uses farm equipment and machinery in assisting a person engaged in a line of business described in subdivision (b)(6) below. A person that assists a qualified person may perform a construction contract only if the person performing the contract is engaged in farm management services as described in Code 0762 of the SIC Manual and the construction is integral to the producing and harvesting of an agricultural product as defined in (b)(5). A person that assists a qualified person must provide physical aid or assistance in the actual producing and harvesting of agricultural products owned by the qualified person and not merely provide aid in administrative, managerial, or marketing activities. A person that assists a qualified person does not include persons performing services such as an attorney, accountant, consultant, or other similar activity. Except as otherwise provided above, a person that assists a qualified person also does not include persons who perform construction contracts or who perform repairs to farm equipment and machinery, or a person that assists such persons.

(4) "Primarily" means used 50 percent or more of the time in producing and harvesting agricultural products as defined in subdivision (b)(5).

(5) "Producing and harvesting agricultural products" means those activities described in Major Groups 01, 02 and 07 of the SIC Manual. Major Group 01 includes establishments engaged in the production of crops, plants, vines, and trees (excluding forestry operations). This major group also includes establishments engaged in the operation of sod farms; in the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and in the growing of hydroponic crops. Major Group 02 includes establishments engaged in the keeping, grazing, or feeding of livestock for the sale of livestock or livestock products (including serums), for livestock increase, or for value increase. Livestock, as specified in Major Group 02, includes cattle, hogs, sheep, goats, and poultry of all kinds; also included are animal specialties, such as horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. Major Group 07 includes establishments engaged in performing soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services. Producing and harvesting agricultural products involves the cultivation of land or the growing, raising, or gathering of the commodities described in Codes 0111 to 0291 of the SIC Manual and integral activities thereto described in Code 0711 to 0783 of the SIC Manual. Such activities include, but are not limited to, flame weeding, pest control, nut hulling and shelling, crop drying, cotton ginning, poultry and pig brooding, livestock breeding, water heating, crop heating, and fruit ripening. Producing and harvesting agricultural products also includes the washing of agricultural products, the inspection and grading of agricultural products or livestock, or the packaging of agricultural products for shipment. Except as otherwise provided under Major Groups 01, 02 or 07 of the SIC Manual, producing and harvesting activities do not include post harvesting activities nor those activities described or otherwise designated in Major Group 20—Food and Kindred Products of the SIC Manual. Nevertheless, the specific activities of sun drying or artificially dehydrating fruits and vegetables as described in Code 2034 of the SIC Manual qualify as producing and harvesting activities where those activities are performed by a qualified person as defined in (b)deletion(6) or a person who assists a qualified person as defined in (b)(3).

For example, a person engaged in a SIC Code 0172 establishment that performs activities such as producing grapes on a grape farm or vineyard, who uses crop drying equipment primarily to remove moisture from the grapes to prevent mold, will qualify for the partial exemption if the grapes are owned by a qualified person engaged in an establishment described in SIC Code 0111 to 0291. However, a person who is exclusively engaged in a SIC Code 2034 establishment that sun dries or artificially dehydrates fruits and vegetables such as dates, prunes or raisins, that purchases grapes from a grape farm, and uses crop drying equipment primarily to change the character of the commodity from a grape to a raisin, will not qualify for the partial exemption since he or she is not engaged in a qualified SIC Code activity. A person engaged in a qualified SIC Code that performs a harvest activity will qualify for the partial exemption to the extent the qualified property is used primarily in such qualified activity despite the fact that the property may otherwise be used less than 50% of the time in post-harvest activities by a person undertaking activities described in SIC Code 2034.

(6) "Qualified person" means a person engaged in a line of business described in Codes 0111 to 0291 of the SIC Manual or performs activities described in Codes 0711 to 0783 in addition to being engaged in a line of business described in Codes 0111 to 0291, which includes cash grains, field crops, vegetables and melons, fruits and tree nuts, horticultural specialties, livestock, dairy, poultry and eggs, and animal specialties and who sells such commodities to others. A qualified person also includes any person conducting activities, as defined in (b)(3) above, that uses qualified property to assist a person engaged in a line of business described herein in producing and harvesting agricultural products owned by the qualified person. A qualified person is not required to be engaged 50 percent or more of the time in a line of business described in Codes 0111 to 0291. A qualified person does not include a person operating a garden plot, orchard, or farm for the purpose of growing produce or animals for that person's own use.

(7) "Qualified property" means farm equipment and machinery, and the parts thereof, as defined in subdivision (b)(1)-(2) used primarily in producing and harvesting agricultural products.

(c) PARTIAL EXEMPTION CERTIFICATES.

(1) IN GENERAL. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was primarily used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e).

The partial exemption certificate form set forth in Appendix B may be used to claim the partial exemption.

(2) BLANKET PARTIAL EXEMPTION CERTIFICATES. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix B may be used as a blanket partial exemption certificate. Appendix B may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate.

(3) FORM OF PARTIAL EXEMPTION CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.

(D) A statement that the property purchased is to be used primarily, or exclusively as to qualifying vehicles, in producing and harvesting agricultural products.

(E) A statement that the purchaser is a person engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual or is a person that assists such classified person by performing an agricultural service described in Codes 0711 to 0783 of the SIC Manual.

(F) Description of property purchased.

(G) Date of execution of document.

(4) RETENTION AND AVAILABILITY OF PARTIAL EXEMPTION CERTIFICATES. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate.

While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption.

(5) GOOD FAITH. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual or in which a person that assists a qualified person states that he or she performs an agricultural service described in Codes 0711 to 0783 of the SIC Manual and states that the property purchased is to be used primarily, or exclusively as to qualifying vehicles, in producing and harvesting agricultural products. If the qualified person or person that assists a qualified person is buying property of a kind not normally used in producing and harvesting agricultural products, the seller should require a statement as to how the specific property purchased will be used. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner.

(d) PARTIAL EXEMPTION CERTIFICATE FOR USE TAX. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e).

The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption.

The partial exemption certificate form set forth in Appendix B may be used to claim the partial exemption.

(e) REFUND OF PARTIAL EXEMPTION.

(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a qualified purchaser of qualified property or, at the purchaser's sole option, the purchaser may be credited with such amount.

(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part.

(f) IMPROPER USE OF PARTIAL EXEMPTION.

(1) PROPERTY USED IN A MANNER NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation.

(2) PURCHASES BY NON-QUALIFIED PERSONS. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person.

(g) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX.

(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used.

(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased.

(h) LEASES TO QUALIFYING PERSONS.

(1) LEASES—IN GENERAL. Leases of tangible personal property which are classified as "continuing sales" and "continuing purchases" of tangible personal property, in accordance with Regulation 1660, "Leases of Tangible Personal Property—In General," may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used in producing and harvesting agricultural products, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption.

(2) LEASES—ACQUISITION SALE AND LEASEBACK. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.

(3) SUBSEQUENT LEASE OF PROPERTY ACQUIRED SUBJECT TO PARTIAL EXEMPTION. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable.

(i) RECORDS. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property purchased was used by the qualified person primarily in producing and harvesting agricultural products.

(j) OPERATIVE DATE. This regulation is operative as of September 1, 2001.

History: Adopted March 27, 2002, operative September 1, 2001.

Amended June 30, 2004, effective August 19, 2004. Subdivision (a)—in 2nd unnumbered paragraph added phrase "and ending on June 30, 2004," added new third unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004. Subdivision (j) replaced the word "effective" with "operative".

Amended April 15, 2009, effective June 4, 2009. Amended subdivision (a) to reflect the increase in the partial exemption rate to 6.25% from April 1, 2009 until Revenue and Taxation Code sections 6051.7 and 6201.7 cease to be operative.

Amended November 16, 2010, effective January 10, 2011. Amended subdivision (b)(5) to remove incorrect cross-reference to subdivision (b)(5) and replace it with correct cross-reference to subdivision (b)(6).


Appendix A.

The following is a list of typical vehicles regarded as farm equipment and machinery:

1. A lift carrier or other vehicle designed and used exclusively for the lifting and carrying of implements of husbandry or tools used exclusively for the production or harvesting of agricultural products, when operated or moved upon a highway.

2. A trailer of the tip-bed type when used exclusively in the transportation of other implements of husbandry or tools used exclusively for the production or harvesting of agricultural products.

3. A trailer or semi-trailer having no bed, and designed and used solely for transporting a hay loader or swather.

4. A spray or fertilizer applicator rig used exclusively for spraying or fertilizing in the conduct of agricultural operations, except anhydrous ammonia fertilizer applicator rigs which have a transportation capacity in excess of 500 gallons.

5. A trailer or semi-trailer which has a maximum transportation capacity in excess of 500 gallons, but not more than 1,000 gallons, used exclusively for the transportation and application of anhydrous ammonia, if the vehicle is either equipped with operating brakes or is towed upon a highway by a motor truck that is assigned a manufacturer's gross vehicle weight rating of ¾ ton or more.

6. A nurse rig or equipment auxiliary to the use of and designed or modified for the fueling, repairing, or loading of an applicator rig or an airplane used for the dusting, spraying, fertilizing, or seeding of crops.

7. A row duster.

8. A wagon or van used exclusively for carrying products of farming from one part of a farm to another part thereof, or from one farm to another farm, and used solely for agricultural purposes, including any van used in harvesting alfalfa or cotton, which is only incidentally operated or moved on a highway as a trailer.

9. A wagon or portable house on wheels used solely by shepherds as a permanent residence in connection with sheep raising operations and moved from one part of a ranch to another part thereof or from one ranch to another ranch, which is only incidentally operated or moved on a highway as a trailer.

10. A trap wagon, as defined in Vehicle Code Section 36016, moved from one part of a ranch to another part of the same ranch or from one ranch to another, which is only operated or moved on a highway incidental to agricultural operations. The fuel tank or tanks of the trap wagon shall not exceed 1,000 gallons total capacity.

11. Any vehicle which is operated upon a highway only for the purpose of transporting agricultural products and is in no event operated along a highway for a total distance greater than one mile from the point of origin of the trip.

12. A portable honey-extracting trailer or semi-trailer.

13. A fertilizer nurse tank or trailer that is not self-propelled and which is moved unladen on the highway and auxiliary to the use of a spray or fertilizer applicator rig.

14. Any cotton trailer when used on the highways for the exclusive purpose of transporting cotton from a farm to a cotton gin, and returning the empty trailer to such farm.

15. A truck tractor or truck tractor and semi-trailer combination which is owned by a farmer and operated on the highways, (1) only incidental to a farming operation, (2) not for compensation, and (3) for a distance of not more than two miles (on the highway) each way. This subdivision applies only to truck tractors with a manufacturer's gross vehicle weight rating over 10,000 pounds that are equipped with all-wheel drive and off-highway traction tires on all wheels, and only to semi-trailers used in combination with such a truck tractor and exclusively in production or harvesting of tomatoes. The vehicles specified in this subdivision shall not be operated in excess of 25 miles per hour on the highways.

16. Any farm tractor used upon a highway to draw a farm trailer carrying farm produce, or to draw any trailer or semi-trailer carrying other implements of husbandry, between farms, or from a farm to a processing or handling point and returning with or without the trailer.

Partial Exemption Certificate; Qualified Sales And Purchases of Farm Equipment And Machinery

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Regulation 1533.2. Diesel Fuel Used in Farming Activities or Food Processing.

Reference: Section 6357.1, Revenue and Taxation Code

(a) GENERAL. Commencing on and after September 1, 2001, Section 6357.1 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of diesel fuel used in farming activities or food processing. The terms "farming activities" and "food processing" are defined below.

For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by Sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on April 1, 2009, and ending on June 30, 2011deletion, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.8, 6201, 6201.3, 6201.5, and 6201.8 of the Revenue and Taxation Code, but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. Given the varying rates of the taxes imposed by sections 6051.8 and 6201.8, the partial exemption applies to the following cumulative sales and use tax rates:

(1) 7.12 percent for the period July 1, 2011, through June 30, 2012;

(2) 7.42 percent for the period July 1, 2012, through June 30, 2013;

(3) 7.19 percent for the period July 1, 2013, through June 30, 2014; and

(4) 7.00 percent on or after July 1, 2014.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Farming activities" mean a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity that may be legally sold to or offered for sale to others. These include the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit or nuts, or of other crops (e.g., grains, vegetables, or cotton); the raising of ornamental trees (other than evergreen trees that are more than six years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals. The raising of animals includes the delivery of feed to the animal feeding operation, whether by the owner or the supplier of the feed. Operating a garden plot, orchard, or farm for the purpose of growing plants or animals for a person's own use shall not be considered a farming activity. Harvesting involves the gathering of any agricultural or horticultural commodity and includes activities such as crop drying, cotton ginning, and fruit ripening. Harvesting an agricultural commodity also includes the washing of the agricultural commodity, the inspection and grading of the agricultural commodity or livestock, and the packaging of the agricultural commodity for shipment as well as those activities delineated in Codes 0723 and 0724 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual). For purposes of this regulation, merely buying and reselling plants or animals grown or raised entirely by another is not raising an agricultural or horticultural commodity. A person is engaged in raising a plant or animal, rather than the mere selling of a plant or animal, if the plant or animal is held for further cultivation and development prior to sale. In determining whether a plant or animal is held for further cultivation and development prior to sale, consideration will be given to all of the facts and circumstances, including: the value added by a person to the plant or animal through agricultural or horticultural processes; the length of time between the person's acquisition of the plant or animal and the time that the person makes the plant or animal available for sale; and in the case of a plant, whether the plant is kept in the container in which purchased, replanted in the ground, or replanted in a series of larger containers as it is grown to a larger size.

Farming activities also include the transportation and delivery of the agricultural or horticultural commodity, as described herein, from the trade or business that cultivated, raised or harvested the commodity to the marketplace, as described in subdivision (b)(5), and any empty haul related to the transportation of that agricultural or horticultural commodity.

Farming activities do not include food processing or transportation and delivery of processed food products to the marketplace.

Example A: A commercial hauler travels from its company yard to Grower A's field to pick up a load of tomatoes. The tomatoes are hauled to a processing plant. The hauler returns to the field with empty trailers. The sale of diesel fuel to the commercial hauler for use in this activity is partially exempt from tax.

Example B: A commercial hauler travels from its company yard to Grower A's field to pick up a load of fresh bell peppers. The bell peppers are sold to a grocery store and are delivered to the grocery store's distribution center. At the distribution center, the hauler picks up a load of pallets to deliver to another customer. The sale of diesel fuel to the commercial hauler for use from the yard the field and to the grocery store's distribution center is partially exempt from tax. The sale of diesel fuel to the commercial hauler for use in delivering the pallets is not partially exempt from tax.

Example C: A nursery owner transports its horticultural products to a distribution center. After delivering the product, the nursery owner makes two stops. The first stop is to pick up fertilizer for use at the nursery. The second stop is personal business unrelated to the nursery operation. The sale of diesel fuel to the nursery owner for use in this example is partially exempt from tax up to and including the first stop.

(2) "Plants" mean an agricultural or horticultural commodity produced in a farming activity which includes, but is not limited to, trees bearing fruit or nuts, other crops, an ornamental tree, a vine, a bush, or sod. Sea plants are produced in a farming activity if they are tended and cultivated as opposed to merely harvested.

(3) "Animals" mean a life form produced in a farming activity which includes, but is not limited to, any livestock, poultry or other bird, and fish or other sea life.

Fish and other sea life are produced in a farming activity if they are raised on a fish farm. A fish farm is an area where fish or other sea life are grown or raised as opposed to merely caught or harvested.

(4) "Food processing" means the activities described in Industry Groups 201, 202, 203, 204, and 207, or Codes 2068 and 2084 of the SIC Manual. Food processing activities also includes transporting raw product, supplies and materials to the processing facility, transporting partially processed food products between various divisions of the same food processing entity for further processing operations, and any empty hauls related to the transportation of that product. Food processing does not include transportation and delivery of processed food products to the marketplace. A food processor is not required to be engaged 50 percent or more of the time in such activities as described herein.

Example A: A for-hire carrier, contracted for by a cheese plant, transports unprocessed milk from a dairy farm to the cheese plant for processing and then returns to the carrier's truck yard. The diesel used in this example is eligible for the partial sales tax exemption.

Example B: A flour mill transports flour sacks from a bag manufacturer to the mill's facility, and then transports those sacks to other flour mills owned by the same entity. The diesel used to transport the sacks in this example is eligible for the partial sales tax exemption, but the transportation of flour is not.

Example C: Cannery A and Cannery B are different divisions of the same food processing entity. Cannery A processes unprocessed tomatoes into tomato paste and then transports the paste to Cannery B for further processing. Cannery B processes the paste into tomato soup which is then transported to a grocery distribution warehouse. From the distribution warehouse the processed product is transported by the buyer to individual grocery stores and other distribution warehouses. Only the movement of paste from Cannery A to Cannery B is eligible for the partial sales tax exemption. The subsequent movement of product to the first distribution center and to retail stores and other warehouses is not eligible for the exemption.

(5) "Marketplace" means the place where a commodity is sold for resale, at retail or for consumption at an animal feeding operation, notwithstanding any intervening activities to prepare the product for sale in the marketplace. Such preparation activities include, but are not limited to, cooling, sorting, inspection, grading, drying, packing, handling, washing, slaughtering and butchering (except as otherwise described in Codes 2011 and 2015 of the SIC Manual), candling, sterilizing, freezing, pasteurizing, homogenizing, and packaging. Producers of agricultural or horticultural products may prepare and market their products through a cooperative, joint venture, corporation or partnership in which they have a financial interest, or other such enterprises, and the diesel used in these enterprises to transport products to the marketplace is eligible for the sales tax exemption.

(6) "Diesel fuel" means, for purposes of this regulation only, any fuel that is commonly or commercially known, sold or represented as diesel fuel No. 1-D or No. 2-D, pursuant to the specifications in American Society for Testing and Materials Standard Specification for Diesel Fuel Oils ("ASTM") D 975–81, which is incorporated herein by reference. Diesel fuel, for purposes of this regulation only, also includes Environmental Protection Agency rated diesel fuel commonly known as "federal fuel" sold for use in locomotives, or which is used in generators, pumps, dehydrators and any other equipment used in the conduct of farming and food processing activities. "Diesel fuel" does not include gasoline, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, alcohol, aviation fuel, except diesel fuel sold for use in aircraft designed for agricultural aerial applications that meets the specifications of ASTM D 1655, jet fuel, bunker fuel, or other like substance used as a fuel. Qualifying diesel fuel shall be identified accordingly on the invoice of sale.

(7) "Qualified activity" means farming activities as defined in subdivision (b)(1) or food processing, as defined in subdivision (b)(4).

(c) PARTIAL EXEMPTION CERTIFICATES.

(1) IN GENERAL. A person who purchases diesel fuel for use in a qualified activity from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a person who purchases diesel fuel for use in a qualified activity, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to partial exemption under this regulation or the duty of collecting the use tax subject to partial exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the diesel fuel, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the diesel fuel to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the diesel fuel to a person that used it in a qualified activity. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e).

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(2) BLANKET PARTIAL EXEMPTION CERTIFICATES. In lieu of requiring a partial exemption certificate for each transaction, a person who purchases diesel fuel for use in a qualified activity may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. A person who purchases diesel fuel for use in a qualified activity must include in the partial exemption certificate how much or what percentage of the diesel fuel purchased will be used in a qualified activity. If purchasing diesel fuel not qualifying for the partial exemption, the purchaser must clearly state in documents such as a written purchase order, sales agreement, or contract that the sale or purchase is not subject to the blanket partial exemption certificate.

(3) FORM OF PARTIAL EXEMPTION CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of diesel fuel if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.

(D) A statement of how much or what percentage of the diesel fuel purchased will be used in a qualified farming or food processing activity.

(E) Date of execution of document.

(4) RETENTION AND AVAILABILITY OF PARTIAL EXEMPTION CERTIFICATES. A retailer must retain each partial exemption certificate received from a person who purchases diesel fuel for use in a qualified activity for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate.

While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may, on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption.

(5) GOOD FAITH. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where the purchaser states that a certain percentage of the diesel fuel purchased will be used in farming activities or food processing. However, a partial exemption certificate cannot be accepted in good faith where the seller has knowledge that the diesel fuel is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner.

(d) PARTIAL EXEMPTION CERTIFICATE FOR USE TAX. The partial exemption certificate must be completed by a person who purchases diesel fuel for use in a qualified activity to claim a partial exemption from use tax from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e).

The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption.

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(e) REFUND OF PARTIAL EXEMPTION.

(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a person who purchases diesel fuel for use in a qualified activity may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a purchaser of diesel fuel for use in a qualified activity or, at the purchaser's sole option, the purchaser may be credited with such amount.

(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a person who purchases diesel fuel for use in a qualified activity filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the diesel fuel otherwise met all the requirements of a person who purchases diesel fuel for use in a qualified activity at the time of the purchase subject to the refund claimed under this part.

(f) IMPROPER USE OF PARTIAL EXEMPTION. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of diesel fuel that is used in a manner not qualifying for the partial exemption under this regulation.

(g) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX.

(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses the diesel fuel in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the diesel fuel at the time the diesel fuel was so removed, converted, or used.

(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for diesel fuel that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the diesel fuel at the time the diesel fuel was purchased.

(h) RECORDS. Adequate and complete records must be maintained by the person who purchases diesel fuel for use in a qualified activity as evidence that the diesel fuel purchased was used in a qualified activity.

(i) OPERATIVE DATE. This regulation is operative as of September 1, 2001.

History: Adopted April 18, 2002, operative September 1, 2001.

Amended June 30, 2004, effective August 17, 2004. Subdivision (a)—in 2nd unnumbered paragraph added phrase "and ending on June 30, 2004," added new third unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004. Subdivision (g)—added the letter "r" to the title "PURCHASE'S" to correct a misspelling. Subdivision (j)—replaced the word "effective" with "operative".

Amended April 15, 2009, effective June 4, 2009. Amended subdivision (a) to reflect the increase in the partial exemption rate to 6.25% from April 1, 2009 until Revenue and Taxation Code sections 6051.7 and 6201.7 cease to be operative.

Amended July 26, 2011, effective October 26, 2011. The amendments revised the first sentence in the fifth paragraph of subdivision (a) so that the fifth paragraph applies to the period commencing on April 1, 2009, and ending on June 30, 2011; and added a new sixth paragraph to subdivision (a) that is applicable to the period commencing on July 1, 2011.3

Partial Exemption Certificate; Qualified Sales And Purchases of Diesel And Farm Equipment And Machinery


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Regulation 1534. Timber Harvesting Equipment and Machinery.

Reference: Section 6356.6, Revenue and Taxation Code.

(a) GENERAL. Commencing on and after September 1, 2001, section 6356.6 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of off-road commercial timber harvesting equipment and machinery, and parts of off-road commercial timber harvesting equipment and machinery, that are purchased by a qualified person for use primarily in timber harvesting. The terms "off-road commercial timber harvesting equipment and machinery," "parts of off-road commercial timber harvesting equipment and machinery," "qualified person," and "commercial timber harvesting operations" are defined below.

For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Commercial timber harvesting operations" means the cutting or removal or both of timber or other solid wood forest products, from timberlands for commercial purposes, together with all the work incidental thereto, including but not limited to, construction and maintenance of roads, fuel breaks, firebreaks, stream crossings, landings, skid trails, beds for the falling of trees, fire hazard abatement, reforestation, and site preparation that involves disturbance of soil or burning of vegetation following timber harvesting activities. Such activities include, but are not limited to, bucking, bunching, chipping, debarking, delimbing, felling, forwarding, loading, piling, skidding, slashing, topping and yarding operations performed on timber. Commercial timber harvesting operations do not include the use of timber in processing activities or other activities resulting in the creation of other commercial wood products for sale to others, including, without limitation, milling, planing, carving, paper manufacturing, the treating of wood with creosote or other preservatives to prevent decay or protect against fire, or the packaging of wood chips for use in preparing food.

(2) "Off-road commercial timber harvesting equipment and machinery" means any new or used device, that may be powered by an internal combustion engine, electric motor, or otherwise, that is necessary in complying with any operational requirements of federal, state, or local government laws and regulations and is designed primarily for use off the highways, to propel, move, draw or cut timber in commercial timber harvesting operations. Such items include, but are not limited to, chainsaws, slashers, debarkers, harvesters, forwarders, feller-bunchers, cable yarding equipment, yarders, loading helicopters, chippers, bulldozers; loading equipment used to lift and move the equipment; graders; water trucks and similar logging road building and maintenance equipment; fuel storage equipment, site preparation equipment; all-terrain vehicles; fire fighting and safety equipment; timber harvest preparation equipment; reforestation tools and equipment; loaders; carriages; skidders; mobile metal spars; delimbers; chokers; steel cables; grapples; front-end loaders, and tractors or rubber tire skidders and other equipment used to fell, delimb, cross-cut, measure, sort, bunch, move and load timber for transport to roadside.

Off-road commercial timber harvesting equipment and machinery does not include junction boxes, switches, conduit and wiring, valves, pipes, tubing incorporated into fixed works, buildings, or other structures, whether or not such items are used solely or partially in connection with the operation of equipment and machinery. Off-road commercial timber harvesting equipment and machinery also does not include supplies such as articles of clothing, fuels, real property, materials or fixtures within the meaning of subdivisions (a)(4) and (a)(5), respectively, of Regulation 1521, Construction Contractors, including such items set forth in Appendix A and B of Regulation 1521.

(3) "Parts of off-road commercial timber harvesting equipment and machinery" means:

(A) All component parts and contrivances include, but are not limited to, belts, shafts, pipes, hoses and moving parts, that are parts of off-road commercial timber harvesting equipment and machinery as defined in subdivision (b)(2) that can be separated from the off-road commercial timber harvesting equipment and machinery and replaced. Parts of off-road commercial timber harvesting equipment and machinery do not include items that are consumed (e.g., burned, evaporate, dissolve, dissipate) through the regular use of the off-road commercial timber harvesting equipment and machinery (e.g., gasoline, cleaning agents, solutions, chemicals) which are ordinarily supplies; however, lubricants and fluids not consumed (e.g., engine oil not consumed as part of fuel for a two-stroke engine) is regarded as a component part.

(B) All repair and replacement parts for off-road commercial timber harvesting equipment and machinery as defined in subdivision (b)(2) which replace previous parts and can include parts that are identical to the parts they replace as well as parts that are different from the ones they replace, such as replacement parts added for the purpose of improving or modifying the off-road commercial timber harvesting equipment and machinery, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by a qualified person or another person. Parts of off-road commercial timber harvesting equipment and machinery do not include tangible personal property used in effectuating the repair of any timber harvesting equipment and machinery such as a wrench used to replace a spark plug, except tools used for repair that are designed exclusively for specific off-road commercial timber harvesting equipment and machinery.

(C) 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, including both operating programs and application programs. Parts of off-road commercial timber harvesting equipment and machinery do not include tangible personal property used primarily in the administration, management, or marketing of timber harvesting operations.

(4) "Primarily" means used 50 percent or more of the time. As used herein, the qualified property has to be designed for use 50 percent or more of the time off-road in commercial timber harvesting operations and be used 50 percent or more of the time in timber harvesting.

(5) "Qualified person" means a person engaged in commercial timber harvesting operations. A qualified person is not required to be engaged 50 percent or more of the time in commercial timber harvesting operations.

(6) "Qualified property" means off-road commercial timber harvesting equipment and machinery, and the parts thereof, as defined in subdivisions (b)(2) and (b)(3) used primarily in timber harvesting.

(7) "Timber" means trees of any species maintained for eventual harvest for forest products or other forest purposes, whether planted or of natural growth, standing or down, including Christmas trees, on privately or publicly owned land, but does not mean nursery stock.

(8) "Timberland" means privately or publicly owned land which is devoted to and used for growing or timber harvesting, or for growing and timber harvesting and compatible uses, and which is capable of growing an average annual volume of wood fiber of at least 15 cubic feet per acre.

(c) PARTIAL EXEMPTION CERTIFICATES.

(1) IN GENERAL. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate that is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was primarily used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e).

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(2) BLANKET PARTIAL EXEMPTION CERTIFICATES. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate.

(3) FORM OF PARTIAL EXEMPTION CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.

(D) A statement that the purchaser is engaged in commercial timber harvesting operations, and that the property purchased is primarily designed for off-road use in commercial timber harvesting operations and will be used primarily in timber harvesting.

(E) Description of property purchased.

(F) Date of execution of document.

(4) RETENTION AND AVAILABILITY OF PARTIAL EXEMPTION CERTIFICATES. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate.

While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption.

(5) GOOD FAITH. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is engaged in commercial timber harvesting operations and states that the property purchased is primarily designed for off-road use in commercial timber harvesting operations and will be used primarily in timber harvesting. If the qualified person is buying property of a kind not normally used in timber harvesting, the seller should require a statement as to how the specific property purchased will be used. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner.

(d) PARTIAL EXEMPTION CERTIFICATE FOR USE TAX. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e).

The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption.

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(e) REFUND OF PARTIAL EXEMPTION.

(1) For the period commencing on September 1, 2001, and ending on June 30, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before September 30, 2002. The retailer must refund the tax or tax reimbursement directly to the purchaser or, at the purchaser's sole option, the purchaser may be credited with such amount.

(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part.

(f) IMPROPER USE OF PARTIAL EXEMPTION.

(1) PROPERTY USED IN A MANNER NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation.

(2) PURCHASES BY NON-QUALIFIED PERSONS. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person.

(g) PURCHASER'S LIABILITY FOR THE PAYMENT OF SALES TAX.

(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used.

(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased.

(h) LEASES TO QUALIFYING PERSONS.

(1) LEASES—IN GENERAL. Leases of tangible personal property which are classified as "continuing sales" and "continuing purchases" of tangible personal property, in accordance with Regulation 1660, "Leases of Tangible Personal Property—In General," may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used primarily in timber harvesting, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption.

(2) LEASES—ACQUISITION SALE AND LEASEBACK. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.

(3) SUBSEQUENT LEASE OF PROPERTY ACQUIRED SUBJECT TO PARTIAL EXEMPTION. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable.

(i) RECORDS. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property purchased was primarily designed for off-road use in commercial timber harvesting operations and was used by the qualified person primarily in timber harvesting.

(j) OPERATIVE DATE. This regulation is operative as of September 1, 2001.

History: Adopted June 19, 2002, operative September 1, 2001.

Amended June 30, 2004, effective August 18, 2004. Subdivision (a)—in 2nd unnumbered paragraph added phrase "and ending on June 30, 2004," added new third unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004.

Amended April 15, 2009, effective June 4, 2009. Amended subdivision (a) to reflect the increase in the partial exemption rate to 6.25% from April 1, 2009 until Revenue and Taxation Code sections 6051.7 and 6201.7 cease to be operative.

Partial Exemption Certificate; Qualified Sales And Purchases of Timber Harvesting and Machinery


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Regulation 1535. Racehorse Breeding Stock.

Reference: Section 6358.5, Revenue and Taxation Code.

(a) GENERAL. Commencing on and after September 1, 2001, section 6358.5 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of racehorse breeding stock purchased for use by a qualified person. The terms "racehorse breeding stock" and "qualified person" are defined below.

For the period commencing on September 1, 2001 and ending December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.

For the period commencing on April 1, 2009, and ending when sections 6051.7 and 6201.7 of the Revenue and Taxation Code cease to be operative, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.

(b) DEFINITIONS. For purposes of this regulation:

(1) "Qualified person" means a person who purchases racehorse breeding stock solely with the intent and purpose of breeding.

(2) "Qualified property" means racehorse breeding stock, as defined in subdivision (b)(3).

(3) "Racehorse breeding stock" means a live horse that meets all of the following criteria:

(A) Is or will be eligible to participate in a horseracing contest in California wherein pari-mutuel wagering is permitted under rules and regulations prescribed by the California Horse Racing Board.

(B) Is capable of producing foals which will be eligible to participate in a horseracing contest in California wherein pari-mutuel wagering is permitted under rules and regulations prescribed by the California Horse Racing Board.

(C) Is or was registered with an agency recognized by the California Horse Racing Board and such registering agency does not register the horse as ineligible for breeding stock. Agencies currently recognized are The Jockey Club, The American Quarter Horse Association, The United States Trotting Association, The Appaloosa Horse Club, The Arabian Horse Registry of America, and the American Paint Horse Association.

Racehorse breeding stock does not include any horse over four years old, or five years old in the case of an Arabian horse, that has neither participated in or trained for a horserace contest on which pari-mutuel wagering is permitted, nor been used for breeding purposes in order to produce racehorses.

(4) "Solely" means 100 percent or "only."

(c) PARTIAL EXEMPTION CERTIFICATES.

(1) IN GENERAL. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e).

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(2) BLANKET PARTIAL EXEMPTION CERTIFICATES. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate.

(3) FORM OF PARTIAL EXEMPTION CERTIFICATE. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements:

(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.

(B) The name, address and telephone number of the purchaser.

(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.

(D) A statement that the property purchased is capable of reproduction.

(E) A statement that the purchaser will use the property solely for the purpose of breeding.

(F) A description of the property purchased.

(G) Date of execution of the document.

(4) RETENTION AND AVAILABILITY OF PARTIAL EXEMPTION CERTIFICATES. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate.

While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require that, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption.

(5) GOOD FAITH. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is purchasing the qualified property solely with the intent and purpose of breeding. If the qualified person is buying a horse of a kind not normally used to breed racehorses, the seller should require a statement as to how the specific property purchased will be used. However, a partial exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to the partial exemption, or will not be otherwise used in a partially exempt manner.

(d) PARTIAL EXEMPTION CERTIFICATE FOR USE TAX. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e).

The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption.

The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption.

(e) REFUND OF PARTIAL EXEMPTION.

(1) For the period commencing on September 1, 2001, and ending on December 31, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before March 31, 2003. The retailer must refund the tax or tax reimbursement directly to the qualified purchaser of qualified property or, at the purchaser's sole option, the purchaser may be credited with such amount.

(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part.

(f) IMPROPER USE OF PARTIAL EXEMPTION.

(1) PROPERTY USED IN A MANNER NOT QUALIFYING FOR THE PARTIAL EXEMPTION. Notwithstanding subdivision (a), tax applies to any sale of, or the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation.

(2) PURCHASES BY NON-QUALIFIED PERSONS. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person.

(g) PURCHASER'S LIABILITY FOR THE PAYMENT OF TAX.

(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used.

(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased.

(h) LEASES TO QUALIFYING PERSONS.

(1) LEASES—IN GENERAL. Leases of tangible personal property which are classified as "continuing sales" and "continuing purchases" of tangible personal property, in accordance with Regulation 1660, "Leases of Tangible Personal Property—In General," may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used for breeding purposes, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption.

(2) LEASES—ACQUISITION SALE AND LEASEBACK. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.

(3) SUBSEQUENT LEASE OF PROPERTY ACQUIRED SUBJECT TO PARTIAL EXEMPTION. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable.

(i) RECORDS. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property was capable of reproduction and purchased by the qualified person solely for breeding purposes.

(j)OPERATIVE DATE. This regulation is operative as of September 1, 2001.

History: Adopted September 11, 2002, operative September 1, 2001.

Amended June 30, 2004, effective August 18, 2004. Subdivision (a)—in 2nd unnumbered paragraph added phrase "and ending on June 30, 2004," added new third unnumbered paragraph to reflect the increase of the state portion of the sales and use tax to 5.25% on July 1, 2004.

Amended April 15, 2009, effective June 4, 2009. Amended subdivision (a) to reflect the increase in the partial exemption rate to 6.25% from April 1, 2009 until Revenue and Taxation Code sections 6051.7 and 6201.7 cease to be operative.

Partial Exemption Certificate; Qualified Sales And Purchases of Racehorse Breeding Stock

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