So what is the big difference between the two and who and what qualifies for Manufacturer’s Exemption?

The manufactures exemption is a partial exemption for a "qualified person" (under Section 6377 of the Revenue and Taxation Code for a period of three years) who is issued a Manufacturer’s Partial Exemption Certificate and/or Manufacturer’s Use Tax Declaration.

A "qualified person" means any person that satisfies the requirements of both subsections (c)(6)(A) and (c)(6)(B), and must have first commenced trade or business activities in a new trade or business in this state on or after January 1, 1994. A "qualified person" must be engaged in those manufacturing lines of business described in Codes 2011 to 3999, inclusive or Codes 7371 through 7373, inclusive of the Standard Industrial Classification Manual published by the United States Office of Management and Budget.

The partial exemption is limited to a portion of the state component of the sales and use tax, which is equivalent to a rate of five-percent (5%) for 2000, and previous years, and four and three quarter (43/4%) for 2001, imposed on a qualified purchase.

A qualified purchase is a purchase or qualifying lease of tax paid tangible personal property, which will be used primarily:

Ø For manufacturing, processing, refining, fabrication, or recycling

Ø For research and development activities as described in Section 174 of the Internal Revenue Code

Ø To maintain, repair, measure, or test any property being used for the above purposes

Ø Special purpose buildings as defined in Regulation 1525.2, Manufacturing Equipment (Beware, this can be very complicated).

The manufacturer’s Partial Exemption Certificate is taken by issuing a completed copy of the certificate to a retailer for each transaction (that is, the certificate must be issued on a transaction-by-transaction basis--- a general of blanket certificate cannot be used). The retailer will take the certificate and deduct 5% or 43/4% of sales tax from the selling price. This certificate is signed by a representative of the State and is exclusive to the business entity listed on the certificate by the State Board of Equalization. The certificate may be reproduced, and must be issued to the retailer within 60 days after the date of purchase and within the three-year period for which this partial exemption is authorized.Manufacturer’s Investment Credit

The manufacturer’s investment credit (MIC), is allowed under Revenue and Taxation Code sections 17053.49 (Personal Income Tax (PIT) Law) and 23649 (Bank and Corporation Tax (B&CT). The MIC is allowed to any qualified taxpayer in an amount equal to six percent (6%) of any qualified costs paid or incurred on or after January 1, 1994, for qualified property that is placed in service in California. The Franchise Tax Board has indicated that the six percent (6%) will not change for 2001.

Generally, qualified costs for the MIC are costs paid or incurred by taxpayer for the construction, reconstruction, or acquisition of qualified property upon which California sales or use tax is paid. Qualified costs for the MIC are further limited to amounts that are properly chargeable to the capital account or the qualified taxpayer.

These costs paid or incurred in or after1994 must be claimed on qualified taxpayer’s State Income Tax Return for the first income year beginning on or after January 1, 1995.

In any case where the MIC exceeds the "tax" the excess may be carried forward to reduce the "tax" in the following year, and succeeding years, either 8 or 10 years, depending on the size of the business.

For purposes of regulations 23649-1 through 23649-11, inclusive, a qualified taxpayer is any taxpayer that is engaged in an activity that is described in Division D of the SIC Manual.

A qualified taxpayer must be engaged in those manufacturing lines of business described in Codes 2011 to 3999, inclusive and on or after January 1, 1998, Codes 7371 through 7373, inclusive of the Standard Industrial Classification Manual published by the United States Office of Management and Budget.

A qualified purchase is a purchase or qualifying lease of tax paid tangible personal property that is classified under IRC section 1245(a), which will be use primarily:

Ø For manufacturing, processing, refining, fabrication, or recycling

Ø For research and development activities as described in Section 174 of the Internal Revenue Code

Ø To maintain, repair, measure, or test any property being used for the above purposes

Ø Pollution control meeting or exceeding established state or local standards.

Ø Special purpose buildings used for the manufacturing process (Calculation of qualifying costs is very complicated and will not be discussed in this article).

Example A manufacture of printing products (printer) purchases a printing press for $500,000 plus tax of 37,500 (500,000 X 7.5%). A credit of $30,000 ($500,000 X 6.0%) may be taken against tax on the taxpayers’ tax return and any excess may be carried forward to reduce tax.