Will California Provide a De Facto Local Tax Exemption for the Sale or Use of Manufacturing Equipment?
Tuesday, May 30, 2023
California Assembly Bill 52 Would Offer Manufacturing Equipment Tax Credit

On March 16, 2023, California Assembly Bill 52 (AB 52) was amended to provide a manufacturing equipment tax credit. If signed into law, taxpayers would be authorized to take an income tax credit for the portion of local sales or use tax paid for equipment that otherwise would qualify for the state’s partial exemption for purchases of certain manufacturing and research development equipment.[1] The credit would be taken on a taxpayer’s California personal or corporate income tax return for tax years beginning on or after Jan. 1, 2024, but ending before Jan. 1, 2026.

Since July 1, 2014, California has provided certain qualified taxpayers with a partial exemption from state sales and use tax on the purchase or lease of qualified machinery and equipment primarily used in manufacturing, research, and development.[2] Under Revenue and Taxation Code section 6377.1, subdivision (a), a taxpayer is eligible for such exemption if the person is (1) primarily engaged in certain types of businesses, (2) purchases qualified tangible personal property, and (3) uses that qualified tangible personal property in a qualified manner. This partial exemption provides a 50% exemption to the state sales and use tax rate of 7.25%, but the exemption excludes any sales and use taxes levied by localities in California.[3]

To make up for the exclusion of local taxes from the sales tax exemption, AB 52 would allow an income tax credit for individuals and entities for local sales or use taxes paid in an amount equal to 50% of the local sales and use tax paid to the California Department of Tax and Fee Administration for equipment that qualifies for the partial sales and use tax exemption under Revenue and Taxation Code section 6377.1. Notably, the Franchise Tax Board, not the California Department of Tax and Fee Administration, would be provided the authority to adopt “regulations necessary or appropriate to carry out the purposes” of the bill because the credit is taken on the taxpayer’s income tax return.[4]

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California Senate Bill 220 was also recently amended to include a corporate tax rate increase from 8.84% to 10.99% for businesses with net income over $1.5 million. See May 4, 2023 GT Alert for more details about the proposal.


[1] Assem. Bill No. 52 (2022-2023 Reg. Sess.) §§ 2, 3.

[2]See Cal. Rev. & Tax. Code, § 6377.1.

[3]See id. § 6377.1(d)(1).

[4] Assem. Bill No. 52 (2022-2023 Reg. Sess.) § 2.

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