Startups can save money on California sales tax using this partial tax exemption

If you are a hardware startup that’s in R&D mode and purchasing physical goods in CA, you should absolutely be taking advantage of the Manufacturing and Research & Development Equipment Exemption. Some biotech and manufacturing startups can save almost four (3.9375) percent on sales and use tax for qualified purchases in California. This partial sales tax exemption has been around since 2014, but was modified in 2017 to adjust the amount of the exemption, include additional types of businesses, and extend it to 2030.

Contact Kruze

CA Sales Tax Exemption

Who can benefit from the California Sales Tax Exemption?

Biotech, manufacturing, electric power generating startups conducing research in California may benefit, based on their NAICS codes and the type of research. The exemption applies to “qualified persons” who purchase (or lease in some cases) “qualified tangible personal property” and then put that property to a “qualified use.” Each of those terms is spelled out in the California tax code. 

Qualified persons are primarily engaged (more than 50 percent of the time) in specific lines of business as defined by NAICS codes. Those businesses include:

  • Firms engaged in research and development for physical, engineering, or life sciences – NAICS code 541712.
  • Biotechnology companies that do R&D – NAICS code 541711
  • Manufacturing companies – NAICS codes 311100 to 339999
  • Companies that generate, produce, store, and distribute electric power – NAICS codes 22111 to 221118, and 221122.

Qualified tangible personal property includes:

  • Machinery and equipment, and other devices used to operate or maintain that machinery.
  • Pollution control equipment that meets California local or regional standards.
  • Buildings or foundations that are an integral part of the manufacturing process, or that are a  research or storage facility for the process.
  • Buildings and foundations used to generate, produce, store, or distribute electrical power.

Qualified use means the property or equipment must be used more than 50 percent of the time for:

  • Manufacturing, processing, refining, fabricating, or recycling processes.
  • Research and development.
  • Maintaining, repairing, or testing the qualified tangible property.
  • Generating, producing, storing, or distributing electrical power.

In addition, qualified use includes property purchased by a contractor as part of a construction contract with a qualified person.

Biotechnology, some hardware startups, manufacturing startups, other life sciences companies are the ones who are most likely to benefit from this credit. 

How can startups benefit from the exemption?

Startups can recognize the tax break at the time of purchase by providing the seller with a partial exemption certificate. The exemption can be used for up to $200 million in purchases each year, and that amount is not prorated – for example, startups launched on October 1 can still claim up to the full $200 million cap for that tax year. 

Let’s look at an example. If you are a San Francisco-based startup, you are subject to an 8.5% sales tax rate. That’s comprised of:

  • 6% California state sales tax
  • 0.25% San Francisco County sales tax
  • 2.25% San Francisco City (special) sales tax

If you purchased $5,000,000 worth of R&D materials you would pay:

  • Without California R&D tax exemption: $5,425,000 [$5,000,000 + ($5,000,000 x 8.5%)]
  • With the R&D tax exemption: $5,228,125. The 8.5% tax rate is reduced by 3.9375% to 4.5625%. So the new total is $5,000,000 + ($5,000,000 x 4.5625%) = $5,228,125.

Your total savings from the partial tax exemption is $223,875.

Also, if you’ve already paid full sales tax for purchases that you now realize are qualified, you may be able to provide a partial exemption certificate to the retailer who can apply for a sales tax refund on your behalf. For use tax refunds, you can apply to the California Department of Tax and Fee Administration.

Other important points for startups

The California partial tax exemption differs from the R&D payroll tax credit. All companies pay payroll taxes every pay cycle, and companies also pay sales taxes when they purchase goods. R&D payroll tax credits are filed on your annual tax return and get you refunds on your payroll taxes, whereas R&D sales tax partial exemptions provide a reduced tax rate on your R&D equipment purchases. Think of them as refunds (R&D payroll tax credit) versus discounts (R&D sales tax partial exemption).

The partial sales tax exemption can provide significant savings to qualified startups, but companies that take advantage of it will need to carefully document their qualifications and the supporting data, and maintain that information. Kruze Consulting can help you with the partial sales tax exemption, as well as other tax credits, including the California R&D payroll tax credit and the federal R&D tax credit. To learn more about these tax benefits and incentives for which your startup may qualify, contact us.  

MASSACHUSETTS R&D SALES TAX EXEMPTION

Some startups may be able to qualify for a sales tax exemption in Massachusetts if they purchase tangible personal property that’s used exclusively for research and development.

READY TO CONNECT FOR A FREE CONSULTATION?

We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!

Talk to an experienced accountant, not a generic sales person

 Kruze Consulting
Alex Janeck
 Kruze Consulting
Edith Silva
 Kruze Consulting
Ian Williams
Viz AI

$250M+ VC Funding Raised


"I had a great experience working with Kruze Consulting when we raised Series A. They know what VCs need to see, and how to present a startup’s books and finances. If you are going to raise venture capital, you need experts like Kruze."
Chris Mansi

Chris Mansi

CEO

Startup Venture Capital Assistance

With former venture capitalists on staff, our team is here to help you navigate the fundraising process and manage your board of directors

 Kruze Consulting
Scott Orn
COO | Former VC
 Kruze Consulting
Healy Jones
VP FP&A | Former VC
Pequity

Scale Remote Operations & Team


"Kruze has supported us above and beyond basic accounting needs by ensuring we have everything we need to expand and support our team wherever they may be located"
Zack Fisch

Zack Fisch

Head of Operations & Legal

Clients who have worked with Kruze have collectively raised over $12 billion in VC funding.

We set startups up for fundrising success, and know how to work with the top VCs.

 Kruze Consulting
Vanessa Kruze, CPA
Founder & CEO
Kruze Logo

Experienced team helping you

Our account management team is staffed by CPAs and accountants who have, on average, 11 years of experience.

 Kruze Consulting
Bill Hollowsky, CPA
VP of Accounting Services
 Kruze Consulting
Claudine Vantomme, CPA
Controller
 Kruze Consulting
Morgan Avery
SUT/R&D Sr. Tax Accountant
 Kruze Consulting
Beth Bassler
Controller, CPA
Protara Therapeutics

Grew from a 2-person startup to a NASDAQ listed public company.


"The Kruze team helped us grow from a 2-person startup to a NASDAQ listed public company in 2 years. We wouldn’t have gotten public without Kruze’s support. Anyone thinking of launching a startup should make Vanessa their first call!"
Jesse Shefferman

Jesse Shefferman

CEO

Kruze Logo

Get in Touch

Please help us connect with you

How can we reach you?

Our first response is typically via email, so please check your inbox.

Help us have a productive first consultation by providing some additional information.

What year was your startup incorporated?

What is your stage of funding?

(pick up from the list)

Approximately how much funding have you raised?

(please enter a dollar value such as 5000000)

Help us understand what you are looking for:

(Optional, click the ones you need)

Anything additional that you’d like to share?

Optional - if you’d like to share anything else to help us prepare for our consultation, please let us know. We are also happy to sign an NDA, just let us know.

  Talk to a leading startup CPA