Cal. Code Regs. Tit. 18, §§ 17053.49-4
(See Regulation Section 17053.49-0 for Table of Contents.)
EXAMPLE 1: D, a qualified taxpayer, purchases three hydraulic turbines from B, a California manufacturer of hydraulic turbines, for $500 to be used in D's manufacturing facility in Escondido. Under the terms of the purchase contract, which is dated February 15, 1994, B agrees to install the turbines at D's manufacturing facility by affixing them to the facility's concrete floor for an additional $100. B charges and collects from D $40 in California sales tax under the contract ($500 x 8%), with the $100 in installation charges being separately stated in the purchase contract and for purposes of this example are assumed to be exempt from California sales and use tax. Under these facts, D has $600 in qualified costs ($500 in costs upon which California sales tax was paid and $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of D purchasing the turbines from B, D enters into a "fixed-price, turn-key" contract with C, the terms of which require D to pay C a total of $640 upon delivery and installation of the turbines in D's manufacturing facility. C, instead of delivering a resale certificate to B, pays $40 ($500 x 8%) in California sales tax to B on its purchase of the turbines. Under C's contract with D, the $40 California sales tax paid by C is a separately stated item. Under these facts, since the sales tax was separately stated in D's contract with C and paid by C on behalf of D, D is treated as having satisfied the California sales tax payment requirement. However, since $40 of the total contract price represents the sales tax paid indirectly by D, the amount of D's qualified costs is $600 ($500 for the turbines plus $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D's contract with C does not separately state the amount of California sales tax paid by C. However, D's books and records substantiate that C paid California sales tax on behalf of D and that the total contract price of $640 is broken down between $500 for the turbines, $40 in California sales tax, and $100 in installation charges. Under these facts, the result is the same as in EXAMPLE 2 since the amount of California sales tax treated as being paid indirectly by D can be determined from D's books and records.
EXAMPLE 1: F, a qualified taxpayer, purchases 50 stainless steel racks for $900 from G for use in F's cheese production line in Santa Cruz. F pays $72 (900 x 8%) in California sales tax on the purchase. F makes an election for California income tax purposes to currently expense the entire cost of the stainless steel racks under Revenue and Taxation Code Section 17265 (Internal Revenue Code Section 179). Under these facts, the $900 paid by F for the stainless steel racks would not be treated as a qualified cost since the $900 is not properly chargeable to F's capital account under Revenue and Taxation Code Section 17265 (Internal Revenue Code Section 179).
EXAMPLE 2: H, a qualified taxpayer doing business in the Los Angeles Revitalization Zone, purchases a commercial baking oven for $25 from I, and pays $2 (8% of $25) in California sales tax on the purchase. H makes an election under Revenue and Taxation Code Section 17266 to expense the entire cost of the oven. Under these facts, the $25 paid by H would not be treated as a qualified cost since the $25 is not properly chargeable to H's capital account.
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that H is instead doing business in the Fresno enterprise zone. Under the provisions of Revenue and Taxation Code Section 17252.5, H elects to expense $10 of the cost of the oven. Under these facts, H may treat only $15 of the total $25 paid for the oven as a qualified cost since the $10 being expensed under Revenue and Taxation Code Section 17252.5 is not properly chargeable to H's capital account.
EXAMPLE 1: G, a qualified taxpayer, purchases a machine that is qualified property from X for $500. The price of the machine includes $50 in separately stated shipping charges. X collects California sales tax of $34 (8% of $450), from G, with the shipping charges assumed to be exempt from California sales and use tax. Upon receipt of the machine, G incurs an additional $50 in directly allocable capitalized labor costs to have G's employees install the machine in G's manufacturing facility in Riverside, and $25 in training costs to train G's personnel to properly operate the machine. Under these facts, only the cost of the machine upon which California sales tax was paid ($450), plus the directly allocable installation costs ($50), would be treated as qualified costs. The $50 paid for shipping charges is not a qualified cost since no California sales tax was paid on such amounts, nor are the shipping charges treated as directly allocable capitalized labor. The $25 incurred by G in training costs is not a qualified cost since training costs are indirect labor costs under subsection (c)(2) of Regulation 17053.49-2.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the $50 in freight charges are not separately stated and X collects $40 (8% of $500) in California sales tax from G. Under these facts, the cost of the machine, including the freight charges, upon which California sales tax was paid ($500), plus the directly allocable installation costs ($50), would be treated as qualified costs.
EXAMPLE 3: H, a qualified taxpayer, contracts with I for $100 to have a machine that is qualified property modified to increase its per-unit output. Assume that the labor costs associated with the modification are exempt from California sales and use tax. Although H does not pay California sales or use tax on the modification work, H may include in its qualified costs the costs of modifying the machine since the $100 is properly treated as a capitalized labor cost that is directly allocable to the modification of qualified property.
EXAMPLE 4: J, a qualified taxpayer, purchases an extended warranty contract on qualified property. J's extended warranty contract provides that all unscheduled maintenance and repairs will be performed at no cost by the seller or its agent. Assume that the costs of the extended warranty contract are exempt from California sales and use tax. Under these facts, the extended warranty contract is not treated as a directly allocable capitalized labor cost since it is not for the construction, modification, or installation of qualified property. As a result, the costs paid for the extended warranty contract are not qualified costs.
EXAMPLE 5: K, a qualified taxpayer, purchases a machine that is qualified property and then uses its own employees to install and modify the machine, including necessary adjustments, alignments and "debugging," so that the machine will properly run K's assembly line. Under these facts, assuming that K properly capitalizes for California tax purposes its direct labor costs for installing and modifying the machine, then the direct costs are treated as directly allocable capitalized labor costs and are thus qualified costs.
EXAMPLE 6: L, a qualified taxpayer, purchases a comprehensive insurance policy on an item of qualified property. L may not include the premiums for the insurance policy as qualified costs because the insurance policy covers risk of loss, and is not a directly allocable capitalized labor cost that is associated with the construction, modification or installation of qualified property.
EXAMPLE 1: On October 1, 1993, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 1994, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 1993 will not be treated as a qualified cost, but the remaining $80 paid in 1994 will be treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and non-qualified property under a binding contract, the $20 paid prior to January 1, 1994, and the $80 paid after December 31, 1993, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 1994, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 1994, and is thus not treated as a qualified cost. However, the remaining $64 ($80 - $16) paid for the machines is treated as a qualified cost.
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 1993, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 1994. Under the terms of the contract, X is required to make a non-refundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 1994, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%).
EXAMPLE 1: On December 15, 1993, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 1993. On February 15, 1994, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 1994, contract is treated as a replacement contract to the December 15, 1993, contract, and the $10 deposit made by P on December 20, 1993, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 1994, and will not be treated as a qualified cost.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 4: On November 1, 1993, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5, 1993. On March 1, 1994, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 1994, contract is treated as a replacement contract to the November 1, 1993, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 1994, contract. The $10 deposit actually paid prior to January 1, 1994, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 1994, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost.
EXAMPLE 1: On May 1, 1993, F, a qualified taxpayer, pays $150 to G for the right to purchase G's manufacturing facility in Stockton for a total contract price of $900 (less the amount paid for the option) at any time prior to May 1, 1995. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 1995, F exercises its option to purchase G's manufacturing facility and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, the option is treated as a binding contract and the $150 paid by F prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than ten percent (10%) of the fixed option price.
EXAMPLE: On December 1, 1993, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 1993, with the balance to be paid on January 30, 1994. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Compton. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 1994.
Cal. Code Regs. Tit. 18, §§ 17053.49-4
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.