By Samantha Trencs and Amy Nogid

The California Board of Equalization (BOE) voted to adopt an amendment to Ca. Code Regs. tit. 18, § 1525.4, to resolve a statutory ambiguity by clarifying that a taxpayer will qualify for the partial sales and use tax exemption available for certain manufacturing and research and development equipment purchases and leases if the purchase has a useful life of one or more years, even if the taxpayer expensed the purchase. The amendment was prompted by a rulemaking petition submitted by the California Taxpayers Association that raised concerns that taxpayers could receive disparate treatment under the exemption depending on whether they capitalized or expensed their acquisitions on their state income/franchise tax returns.

The changes expressly allow taxpayers to substantiate their qualification under the “useful life” criteria by reference to either a warranty, a service contract, or an industry replacement standard of one year or more.

The BOE adopted the amendments despite the Department of Finance’s position that the amendments exceeded the scope of the BOE’s statutory authority and that the BOE failed to consider the economic impact of the amendments. However, the BOE maintained that the amendments were necessary to ensure that the partial exemption from sales tax legislation, California Revenue and Taxation Code § 6377.1, which became effective on July 1, 2014, was utilized “as originally anticipated and intended by the Legislature.”^[1] Accordingly, the BOE made the amendments retroactive to the effective date of the statute. Under California’s rulemaking process, the BOE’s adoption was forwarded to the Office of Administrative Law (OAH) to confirm compliance with the Administrative Procedure Act for approval by February 17, 2016. State Board of Equalization’s Adoption of Proposed Amendment to California Code of Regulations, Title 18, Section 1525.4, Manufacturing and Research and Development Equipment (Cal. State Bd. of Equalization).

[1] Updated Informative Digest for the State Board of Equalization’s Adoption of Proposed Amendment to California Code of Regulations, Title 18. Section 1525.4, Manufacturing and Research and Development Equipment (Cal. State Bd. of Equalization).