Current Sales/Use Tax Rate
The rates for sales/use tax purposes are the same. The most current tax rates can be downloaded at the website of the at California State - Board of Equalization.
California sales tax applies to all purchases of tangible property from a California retailer or an out-of-state retailer engaged in business in California (nexus).
Use tax applies to the storage, use or consumption of tangible personal property from an out-of-state vendor not doing business in California.
Sales/use tax applies only to tangible property. Services are not subject to the California sales/use tax.
In the event that the vendor accidentally or intentionally omits the sales or use tax on the invoice, receipt, or sales agreement/contract, The University Corporation will self assess the tax and remit to the State of California.
All purchase orders and check requests submitted must therefore include the sales/use tax, if applicable. If a sales/use tax that needed to be charged was not included in the Purchase Order/Check Request, The University Corporation will automatically calculate and include the amount.
No Sales Tax Exemption for CSUN or TUC
As a matter of law, CSUN is not exempt of sales and use tax on purchases of tangible personal property. Sales to the State of California and state political subdivisions (counties, cities and special districts) are generally taxable. This is true even if the purchase is made using federal funds.
As to the partial sales tax exemption, according to the Chancellor’s Office (CO) communication with the State Board of Equalization’s (see BOE Opinion below) the conclusion is that the CSU does not meet at least one of the three criteria to claim the exemption. Accordingly, the CO advises campuses to not claim this benefit unless a separate cost center is established which is 50% or more engaged in R&D activity.
STATE BOARD OF EQUALIZATION450 N STREET, SACRAMENTO, CALIFORNIAPO BOX 942879, SACRAMENTO, CALIFORNIA 94279-00441-916-324-2883 · FAX 1-916-322-0187www.boe.ca.gov
May 27, 2016
Dear Ms. McNiel:
Your email was referred to me for reply regarding our advice on the proper application of the California Sales and Use Tax Law with respect to the partial exemption on manufacturing and research and development equipment.
As you are aware, whether a purchase or lease of machinery or equipment qualifies for a partial exemption from tax will depend on several factors. To qualify for the partial exemption, the sale or purchase of tangible personal property must meet three basic requirements. First, the item must be qualified tangible personal property as defined in Regulation 1525.4. Second, it must be sold to a “qualified person.” Third, the item must be used primarily (50% of more of the time) in manufacturing, processing, refining, fabricating, recycling, or research and development.
This response will focus on the qualified person requirement since that is the one you are questioning.
In order to qualify for the partial exemption you must be considered a qualified person. A "qualified person" means a person who is primarily engaged (50 percent or more of the time) in those lines of business described in the North American Industry Classification System (NAICS) Codes 311100 to 339999, inclusive, 541711, or 541712 published by the United States Office of Management and Budget (OMB), 2012 edition. A “qualified person” may be “primarily engaged” either as a legal entity or as an establishment within a legal entity.
As you know, universities are not “primarily engaged” in those lines of business described in Codes 311100 to 339999, inclusive, 541711, or 541712 of the NAICS. As such, they cannot qualify for the partial exemption as a legal entity. However, as a legal entity, California State University (CSU) may operate separate establishments such as, “cost centers” or “economic units” that may qualify for the partial exemption if the business activities of the “cost centers” or “economic units” are best described by a qualifying NAICS code and the legal entity (CSU) keeps separate books and records for the separate establishments (e.g. school departments). There may be more than one qualifying establishment within a legal entity. The legal entity (CSU), must keep separate books and records for each “cost center” or “economic unit”.
The question now becomes is a grant for a research project considered an establishment when CSU maintains records showing how grant funds are used on the research project. Unfortunately, the answer to this question is no, the segregation of grant funding for research projects do not constitute an establishment for purposes of the partial exemption for manufacturing and research and development equipment.
Establishments are physical locations such as a department within a university designated as cost centers or economic units where separate books and records are maintained showing revenue, costs, number of employees, wages or salaries, property and equipment, job costing, or other financial data pertaining to the qualified activity. Based on your email, it appears your records may show how the grant money is spent, but the records will not reflect data commonly seen in financial statements of an establishment such as number of employees, wages, and other operating expenses. It is possible for a department who is conducting the research project to be considered an establishment if separate books and records are maintained for that department. However, since you stated that CSU does not have any universities that have departments or staff dedicated to research and that all faculty conducting research has teaching responsibilities, your departments may not be primarily engaged in a qualified research and development activity.
Therefore, even if we assume that departments who are engaging in research and development activities are considered establishments that maintain separate books and records, they would still need to be primarily engaged in research and development activities rather than being primarily engaged in a teaching activity. As for the grants themselves, I do not believe they meet the definition of an establishment as defined in Regulation 1525.4 since they are not tied to a physical location where all revenue, assets, and costs are separately accounted for.
Regulation 1525.4Manufacturing and Research & Development Equipment, states in part, that a "qualified person" means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB), 2012 edition. With respect to Codes 3111 to 3399, a person will not be precluded from the definition of a "qualified person" when there is no applicable six digit NAICS code to describe their line of business, provided that their business activities are reasonably described in a qualified four digit industry group. For example, a business in the recycling industry may be regarded as a qualified person when the activities of the establishment are reasonably described in a qualified four digit industry group. For the purpose of this subdivision:
A qualified person may be "primarily engaged" either as a legal entity or as an establishment within a legal entity. "Legal entity" means "person" as defined in RTC section 6005.
A person is "primarily engaged" as an establishment if, in the prior financial year, the establishment derives 50 percent or more of gross revenue (including inter-company and intra-company charges) from, or expends 50 percent or more of operating expenses in a qualifying line of business. Alternatively, an establishment is "primarily engaged" if, in the prior financial year, it allocates, assigns or derives 50 percent or more of any one of the following to or from a qualifying line of business: (1) employee salaries and wages, (2) value of production, or (3) number of employees based on a full-time equivalency.
There may be more than one qualifying establishment within a legal entity.
In the case of a nonprofit organization or government entity, "primarily engaged" with regard to gross revenue means 50 percent or more of the funds allocated to the entity or establishment are attributable to a qualifying line of business.
For purposes of this subdivision, "establishment" includes multiple or single physical locations, (including any portion or portions thereof), and those locations or combinations of locations (including any portion or portions thereof) designated as a "cost center" or "economic unit" by the taxpayer, where a qualified activity is performed, and for which the taxpayer maintains separate books and records that reflect revenue, costs, number of employees, wages or salaries, property and equipment, job costing, or other financial data pertaining to the qualified activity. A physical location may be described in more than one NAICS code.
In summary, maintaining records showing how grant money is used on research projects conducted by CSU faculty and graduate students is not adequate to show that CSU has designated a grant for a research project as an establishment within CSU. You would need to maintain books and records normally seen from an establishment that is designated as an economic unit or cost center within a legal entity.
For more information on the manufacturer’s exemption, please visit our Manufacturing Exemption industry page and publication 541, Manufacturing and Research & Development Exemption Tax Guide, located on our website.
The answer given is intended to provide general information regarding the application of the tax and will not serve as a basis for relief of liability under Revenue and Taxation Code section 6596.
I hope this information is helpful. If you have any further questions regarding this or any other issue, please call our Customer Service Center at 1-800-400-7115. You may also visit our website at www.boe.ca.gov.
Business Taxes Compliance Specialist
For questions regarding sales tax, please contact The University Corporation - Purchase Orders at extension 7289.