§ 17053.49-10. Recordkeeping Requirements.

(a) In General . For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed MIC. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the MIC was allowed remains open, and, in the case of any MIC that is being carried forward, for the additional number of years that the actual carryforward of such MIC occurs.

(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts which affect the allowance and amount of the MIC. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income tax purposes will be adequate substantiation for the MIC.

EXAMPLE 1 : X, a qualified taxpayer, claims a MIC for the purchase of 100 computers to be used in X's manufacturing facility in West Los Angeles. Assume the computers were purchased from a mail order retailer located in South Dakota. If X has only retained the original invoice and a cash disbursements journal, neither of which reflect that California sales or use tax was paid by X, then the invoice would not be sufficient to establish that California sales or use tax was paid on the computers. However, if X has retained a copy of a timely filed California use tax return that clearly demonstrates that California use tax was paid by X with respect to the computers, then X would be treated as having paid or incurred qualified costs.

EXAMPLE 2 : Assume the same facts as in EXAMPLE 1, except that X intends to use 20 of the computers for general administrative functions such as payroll and marketing. In addition to the records necessary to establish that California sales or use tax was paid, X should also retain a copy of the purchase contract containing a detailed list of the computers by model number so that X can establish which of the computers are being used in a qualified activity and which are not being used in a qualified activity.

(c) Affidavit Regarding Sales and Use Tax. For purposes of this regulation only, in the case of any lump sum or turn key contract, the requirement that California sales or use tax be paid may be established by reference to bids, contracts or affidavits from the contractor. For purposes of determining whether California sales or use tax has been paid, directly or indirectly by the contractor, when it is not a separately stated contract amount, a qualified taxpayer shall be entitled to rely on a written representation to that effect from the contractor, and California sales or use tax shall be deemed to have been paid in the absence of affirmative knowledge on the part of the qualified taxpayer that California sales or use tax was not paid.

(d) Written Statement by Lessor to Lessee. In the case of any leasing transaction described in subsection (b) of Regulation 17053.49-6 (relating to operating leases), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property upon which the lessee may claim the MIC and the amount of that cost upon which California sales or use tax was paid. This statement must be provided to the lessee within 45 days after the close of the lessee's taxable year for which the MIC is allowable to the lessee. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” This written statement should not be filed with any return of either the lessor or lessee, but shall instead be retained by the lessee and made available to the Franchise Tax Board upon request.