Manufacturing and R&D Equipment Sales Tax Exemption Proposal in CA - AB 1719

California is one of the few states that requires businesses to pay sales tax on manufacturing and R&D equipment they buy and use in the state. This makes California a very expensive state for manufacturer and companies engaged in R&D work to operate in, particularly when the sales tax rate is close to 10% in some California counties. This extra cost alone can be reason enough for companies not to locate manufacturing and R&D operations in California. It is not a business-friendly situation.

AB 1719 was introduced and amended in February 2010 to provide a state level sales tax exemption for tangible personal property used "primarily in any stage of manufacturing, processing, refining, fabricating, or recycling of property; in research and development; to maintain, repair, measure, or test specified property." The local portion of the sales tax would still be assessed.

A significant tax law improvement of AB 1719 is that it eliminates (or greatly reduces) pyramiding. When a business pays tax, that tax is likely to get built into the price charged to customers (and some ends up getting paid by employees and shareholders (indirectly)). Assuming the customer is charged tax on the sale, the end result is that a tax is charged on a tax - pyramiding. The best way to avoid pyramiding is to only have the final consumer pay sales tax, not businesses.

AB 1719 is a good idea. The problem though is that California has a big budget shortfall. Of course, since there is likely relatively little manufacturing equipment being purchased today, perhaps the revenue hit of exempting new purchases isn't too bad. It would be interesting to see the revenue estimate. The upside is that it could hopefully encourage businesses to expand in California rather than going to other states that don't impose sales tax on equipment purchases. This would generate income taxes from more workers (and higher paid ones that work with this type of equipment).

The public likely won't like this bill - a tax "giveaway" to businesses. But lawmakers should help get the word out that ultimately, businesses do not pay taxes because they are all passed on to workers, customers and investors. Another approach would be to phase-in the change to spread the revenue loss out over a few years, perhaps tied to job increases in the sectors that are eligible for the sales tax exemption.

But, there are also other needs for any sales tax dollars that state thinks it doesn't need. The CA sales tax rate is too high - it is the highest among the states. As I've discussed here numerous times, lawmakers need to broaden the base to include digital goods purchased by individuals, personal services and entertainment and then LOWER the rate. This will make the tax much more fair and neutral.

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