How do California manufacturers use the partial exemption and Cal Competes?

The partial exemption: mechanics, scope, and the certificate discipline

The exemption removes 3.9375 percent, the bulk of the state's own share of the rate, from qualifying purchases and leases (Revenue and Taxation Code section 6377.1; California Code of Regulations, title 18, section 1525.4). Local and district taxes, and the state-levied portions of the rate dedicated to local government, still apply (Revenue and Taxation Code section 6377.1(d)), which is why invoices under the exemption show a reduced rate rather than zero. Three questions decide every transaction: whether the buyer is a qualified person, whether the property is qualified property, and whether the use is a qualified use.

A qualified person is one primarily engaged in manufacturing under the manufacturing NAICS ranges, in qualifying research and development, or, since 2018, in the generation, storage, or distribution of electric power; apportioning trades or businesses mainly in extractive, savings and loan, or banking and financial activities are excluded (Revenue and Taxation Code section 6377.1(b)). Primarily engaged has a definition, and it is where the contested cases arise. A legal entity qualifies if, in its prior financial year, 50 percent or more of its gross revenue came from, or 50 percent or more of its operating expenses went to, a qualifying line of business, and an establishment within a larger entity can qualify on the same tests or on 50 percent of its salaries and wages, value of production, or full-time equivalent employees; a buyer without a prior qualifying year measures over the one-year period following the purchase (California Code of Regulations, title 18, section 1525.4(b)(10)). Status is measured at the time of purchase, so equipment bought in 2017 for an electric power business that became eligible only on January 1, 2018 did not qualify (Appeal of Hanwha Q Cells EPC USA LLC, OTA No. 21037328, May 10, 2022), and the activity itself must be the qualifying one: the Office of Tax Appeals has held that selling solar facilities to homeowners is not a qualifying line of business (Appeal of Hanwha Q Cells America, Inc., 2026-OTA-137), and the CDTFA has concluded that hydrogen fueling stations are not primarily engaged in a qualifying line even though they compress, filter, and cool hydrogen (CDTFA legal opinion, Assignment No. 20-559, March 12, 2021).

Qualified property is machinery and equipment with a useful life of a year or more, including components and certain special purpose buildings and foundations that function as an integral part of the qualified activity, but not consumables, furniture, or general administrative assets. Repair and replacement parts can qualify, but the useful-life test carries a trap they walk into regularly: useful life follows the buyer's own state income or franchise tax treatment, so property deducted under the state analogs of section 179 is deemed to have a useful life of one or more years, while molds and repair parts expensed under the federal de minimis safe harbor do not qualify, whatever their physical life (Revenue and Taxation Code section 6377.1(b)(13)(A); Appeal of Owens-Brockway Glass Container, Inc., 2019-OTA-158P, a precedential opinion; Appeal of Stremicks Heritage Foods, LLC, 2023-OTA-548).

The use test is a time test: the property must be used in the qualifying activity 50 percent or more of the time (Revenue and Taxation Code section 6377.1(b)(5)), so the forklift that splits its hours between the production floor and the shipping dock has a real percentage question while the mixing vessels on the production line do not. The exemption is capped at 200 million dollars of qualifying purchases per calendar year, and the cap is shared by all members of a combined reporting group rather than counted taxpayer by taxpayer (Revenue and Taxation Code section 6377.1(e)(1)(A)), a ceiling most mid-market manufacturers never approach but a planning line for large expansions and for unitary groups with several California operations.

Execution is paperwork at the point of purchase: the partial exemption certificate, currently the CDTFA-230-M, delivered to each vendor, blanket certificates for recurring suppliers, a purchase order or invoice number where the certificate covers a single purchase, and, for out-of-state purchases where no vendor collects, the same partial rate applied in the buyer's own use tax accrual. The certificate also draws the compliance boundary: if, within one year of the purchase, the property is removed from California, converted to a nonqualifying use, or used in a manner not qualifying for the exemption, the purchaser owes the exempted tax plus interest, as though it were a retailer making a retail sale of the property at that time (Revenue and Taxation Code section 6377.1(e)(1)(B), (e)(2); California Code of Regulations, title 18, section 1525.4(d)(2), (e)). The removal prong is the one multistate manufacturers miss: shipping a certified machine to an out-of-state plant within the first year triggers the same recapture as misusing it in California. An audit of a manufacturer will test the exemption documentation, invoices, certificates, and use records, the way a California sales tax audit tests any exemption certificate. The exemption runs through mid-2030 under current law, so equipment planning several years out should note the horizon.

Cal Competes: a competition, not an entitlement

The credit (Revenue and Taxation Code sections 17059.2 and 23689) works nothing like the exemption. Each fiscal year the administering office, the Governor's Office of Business and Economic Development (GO-Biz), announces a small number of application windows and the amounts available; applications are filed inside a window or not at all. The evaluation is competitive, weighing announced factors, the number and wage level of full-time jobs to be created or retained, the investment committed, the strategic importance of the project to the state or region, the extent to which the credit will influence the decision, and the incentives already available to the applicant from state, local, and other sources (Revenue and Taxation Code section 23689(a)(2)), and the process is a two-phase funnel in which a quantitative cost-benefit screen precedes a qualitative review and negotiation. What a successful applicant receives is not a rate reduction but a contract: a credit agreement, typically with year-by-year milestones for hiring and investment although the statute also permits allocation in full upon approval, approved by a committee whose composition is set by statute, with recapture if the milestones fail. The program's runway now extends well past the exemption's: 2026 legislation extended GO-Biz's authority to allocate the credit through the 2032-33 fiscal year, with the credit itself available for taxable years beginning before January 1, 2035 (Revenue and Taxation Code section 23689(a)(1), (a)(2), (g)(1)(A)), and for fiscal year 2026-27 the office has announced 819,843,124 dollars across three application periods (GO-Biz notice, June 30, 2026).

A companion grant program for applicants that cannot use an income tax credit efficiently received one-time funding for three fiscal years ending in 2023-24 and has not been funded since, so the credit is currently the only California Competes instrument available. A manufacturer that cannot absorb a nonrefundable income tax credit may separately consider the CAEATFA sales and use tax exclusion, a distinct program with its own application and approval process (Revenue and Taxation Code section 6010.8).

Two disciplines decide most outcomes. First, timing: the credit rewards decisions it can still influence, so the application belongs before the expansion is publicly committed, and a company that signs the lease first has weakened its own case. Second, preparation: the application requires project-level detail, headcount plans, wage schedules, investment budgets, timelines, and the information request should be assembled before the window opens, because the windows are short and the data collection is the slow part. A manufacturer running both instruments on one expansion uses them on their natural axes: the exemption cuts the sales and use tax cost of the equipment as it is purchased, transaction by transaction, while the credit offsets income or franchise tax over the agreement years as the jobs and investment milestones are met. That offset is capped. For taxable years beginning on or after January 1, 2024, and before January 1, 2030, credits, including this one, may reduce tax by no more than 5 million dollars a year, a limit measured across all members of a combined reporting group, and an annual election can make the disallowed amount refundable in installments over a later five-year period, an election likewise available for taxable years beginning before January 1, 2030. For taxable years beginning on or after January 1, 2030, credits, including this one, may reduce tax by no more than the greater of 70 percent of tax or 5 million dollars, and the excess carries over (Revenue and Taxation Code sections 23036.4, 23036.5, and 23036.6 for corporations, and sections 17039.4, 17039.5, and 17039.6 for personal income tax, as amended and added by Senate Bill 122, Stats. 2026, ch. 23; the low-income housing credit sits outside the limitation). For any award expected to deliver more than 5 million dollars of annual offset, the limitation, not the agreement schedule, sets the pace of the cash benefit. Neither program bars a manufacturer from claiming the other, although the credit statute lists the incentives already available to the taxpayer in the state among the factors that set the amount of the credit (Revenue and Taxation Code section 23689(a)(2)(E)).

Practice notes

For the exemption, the implementation is a workflow, not a memo. The sound practice is to identify the qualified activities and map the NAICS position, to build the certificate into purchasing so every qualifying order carries it automatically, to configure the use tax accrual for out-of-state equipment at the partial rate, to keep a use log, hours in the qualifying activity against total hours, for mixed-use assets near the 50 percent line, and to keep the income tax and sales tax treatment of small parts consistent, because a de minimis expensing election made for income tax convenience disqualifies the same parts from the exemption. A sweep of recent purchases belongs in the first review: tax reimbursement paid on qualifying equipment can be recovered by issuing the certificate and having the vendor file a claim for refund, and use tax paid directly can be claimed from the state, in each case within the limitations period, generally three years (Revenue and Taxation Code section 6902), which turns the first review into a refund project as often as a prospective fix. For the credit, the windows belong on the calendar the day they are announced, the information request is best assembled before the window opens, and the application is strongest when framed around influence, what the credit changes about the decision, because that is what the evaluation is designed to detect; an applicant expecting more than 5 million dollars of annual benefit also models the business credit limitation and the refundable election before negotiating the delivery schedule. The vendors need briefing as well: a frequent friction is a supplier who has never seen a partial exemption certificate and either refuses it or, worse, invents an approval requirement; a one-page explanation with the certificate, and the state's own industry guide cited, resolves the problem faster than argument. G&G State Tax Group provides manufacturing exemption implementation, refund review, and California Competes application support alongside its state and local tax practice.