§ 17053.49-5. Qualified Property.

(b) General Requirements for Qualified Property . Except as provided in subsections (c) or (f) of this regulation, in order for property to be treated as qualified property, the property must satisfy each of the requirements of this subsection of this regulation.

(1) Tangible Personal Property . Except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, property must be tangible personal property. For purposes of this section, the term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, for example, production machinery, printing presses, and testing equipment which is contained in or attached to a building is tangible personal property. Furthermore, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structures) shall be considered tangible personal property even though located outside a building. The determination of whether property will be treated as an inherently permanent structure shall be made under Internal Revenue Code Section 1245(a), so that generally property will be treated as an inherently permanent structure (and thus not tangible personal property) if the property is either intended to be or is in fact affixed permanently, and is either incapable of being moved or, if movable, would suffer a significant degree of damage upon its removal. Local law, including state, county, city, or regional, shall not be controlling for purposes of determining whether property is or is not “tangible” or “personal,” so that the fact that under local law property is held to be personal property or tangible property shall not affect the determination of whether such property is tangible personal property for purposes of the MIC.

EXAMPLE 1 : B, a qualified taxpayer, manufactures heavy tractors in a manufacturing plant located in Tustin. B decides to upgrade its assembly line by installing a heavy duty overhead crane which will be permanently affixed to the building structure. Prior to installing the crane B constructs steel columns that extend from the crane's girder to the roof of the building. Under these facts, while the steel columns may be treated as “other tangible property” under Internal Revenue Code Section 1245 (a) (3) (B), the steel columns are not tangible personal property and thus not qualified property.

EXAMPLE 2 : Assume the same facts as in EXAMPLE 1, except instead consider the heavy duty overhead crane. The crane moves back and forth along the assembly line on craneway tracks that are permanently bolted to the building's ceiling beams and is hard-wired to the building's electrical system. Despite its permanent affixation to the building, the crane is an item of tangible personal property.

(2) Section 1245 (a) Property. Property must be defined in Internal Revenue Code Section 1245(a). However, since property must also be tangible personal property under subsection (b)(1) of this regulation, then, except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, only personal property described in Internal Revenue Code Section 1245(a) (3) (A) will be treated as qualified property for purposes of the MIC. Except as provided in the previous sentence, other tangible property that is described in Internal Revenue Code Sections 1245(a) (3) (B) through (F) is not “personal” property and is thus qualified property under Revenue and Taxation Code Section 17053.49.

EXAMPLE 1: F, a qualified taxpayer, manufactures railroad cars. F constructs a building which is open at both ends through which a length of track travels to move the cars during several steps in the manufacturing process. Since the building is not tangible personal property defined in Internal Revenue Code Section 1245(a) (3) (A), it would not be treated as qualified property.

EXAMPLE 2 : Assume the same facts as in EXAMPLE 1, but in addition, F constructs and installs machinery in the building to facilitate the assembly of the railroad cars. Although the machinery is permanently installed in the building, it is not a structural component of the building and can be removed without dismantling the building. As a result, the machinery is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A).

(3) Used in an Activity Described in Division D of the SIC Manual. Property must be used in an activity that is described in Division D of the SIC Manual. Generally, this requirement will be satisfied if the taxpayer is using the property in the same activity that made the taxpayer a qualified taxpayer under Regulation 17053.49-3. Thus, for example, if a taxpayer that is engaged in manufacturing electromedical equipment (SIC Code 3845) is treated as a qualified taxpayer under Regulation 17053.49-3), and the qualified taxpayer purchases tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A) for use in its electromedical equipment manufacturing activity, the requirement that the property be used in an activity described in Division D of the SIC Manual would be satisfied. In addition, in the case of a qualified taxpayer that is engaged in two or more activities that are properly classified under Division D of the SIC Manual, the use of property in any of such Division D activities will satisfy this requirement that property be used in an activity described in Division D of the SIC Manual.

(4) Primarily Used in a Qualified Activity. Property must be primarily used in a qualified activity.

EXAMPLE 1: B, a qualified taxpayer, manufactures trucks and automobiles in San Diego. B constructs a compressor for use in B's assembly line. The compressor is used for 500 hours in the assembly line, which is part of B's qualified activity, and for 250 hours in B's warehouse, which is part of B's non-qualified activity. Since B used the compressor in B's qualified activity for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (500 hours/750 hours, or 66.7%), the compressor is primarily used in a qualified activity.

EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B instead uses the compressor for 500 hours in the non-qualified activity and 250 hours in the qualified activity. Under these facts, the compressor is not primarily used in a qualified activity since the compressor was used less than 50 percent of the time during the 12-month period following the date the compressor was placed in service in California by B in a qualified activity (250 hours/750 hours, or 33.3%).

EXAMPLE 3 : Assume the same facts as in EXAMPLE 1, except B uses the compressor for a total of 100 days during the 12-month period following the date the compressor was placed in service in California by B. During each of those 100 days, B uses the compressor for four hours in the qualified activity and six hours in the non-qualified activity. Although B is using the compressor in the qualified activity during each of the 100 days that it is actually in operation, the compressor is not primarily used in a qualified activity because the total number of hours the compressor is used in a qualified activity is less than 50 percent of the total hours of operation of the compressor during the 12-month period following the date the compressor was placed in service in California by B.

EXAMPLE 4: C, a qualified taxpayer, manufactures telephone equipment in San Jose. C purchases ten personal computers to be used in the company offices. The computers are to be used in part for administration and management, a non-qualified activity, but are also used for the tracking of assembly line operations by directly monitoring the performance, safety, and production of the assembly line, a qualified activity. As long as the computers are used at least 50 percent of the time in the qualified activity during the 12-month period following the date the compressor was placed in service in California by C, then C shall be treated as primarily using the computers in a qualified activity.

EXAMPLE 5: R, a qualified taxpayer, manufactures light bulbs from raw materials such as glass, tungsten, aluminum, copper and paper. R initially receives the raw materials at its warehouse in North Hollywood, and then, when needed, transports them using its own trucks to R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant, the raw materials are placed in a receiving area where they are then moved via forklift to their respective areas in the plant for introduction into the process of manufacturing the light bulbs. Under these facts, R's qualified property does not include the trucks used to transport the raw materials from the warehouse to the manufacturing plant since the raw materials have not been introduced into R's manufacturing “process” until the raw materials have been delivered to the manufacturing plant. However, the forklift would be qualified property since once the raw materials are received at the same premises where R's manufacturing activity is being conducted, the movement of the raw materials via forklift is treated as part of R's manufacturing process.

EXAMPLE 6: Q, a qualified taxpayer, is an integrated oil producer that refines petroleum products. Q owns the wells from which the oil is extracted and, after extracting the oil from the ground, Q then pumps the oil, via pipeline, to its refinery located several miles from the well sites. The pipeline transverses other property for which Q has easements but does not own. Once the oil reaches the refinery, it is immediately introduced into Q's refining process. Q may not include as qualified property the oil wells or the pipelines because these are not used as part of the refining process.

EXAMPLE 7 : T, a qualified taxpayer, manufactures copper “romex” wire in Santa Ana. As part of T's manufacturing process, T purchases a machine to process the copper wire by coating it with white or black insulation prior to wrapping the wire in white plastic insulation. T's machine applies the materials and labor necessary to modify or change the characteristics of the copper wire. T's machine is used in “processing” the “romex” wire and thus would be qualified property.

EXAMPLE 8 : Assume the same facts as in EXAMPLE 7, except that T also uses the machine to coat its mailing labels for shipment of the wire. Assume that the processing of the copper “romex” wire is complete upon its being wrapped in the white plastic insulation, and that the number of hours the machine is used during the 12-month period following the date the machine was placed in service in California by T for the “processing” of the wire is less than 50 percent of the machine's total use during the period. Under these facts, the machine is no longer primarily used for “processing,” a qualified activity, but is instead primarily used to coat the mailing labels, a non-qualified activity, so that the machine is not qualified property.

EXAMPLE 9 : C, a qualified taxpayer, manufactures cameras in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured cameras following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the labor costs, are properly capitalized by C. Although C has “fabricated” the shelving, the shelving is not qualified property since it is not used in C's manufacturing process, which is a qualified activity, but is rather used for storage, which is a non-qualified activity.

EXAMPLE 10: J, a qualified taxpayer, manufactures aquariums in Whittier. As part of J's manufacturing process, J uses specialized equipment which recycles used styrofoam packing material by converting it into plastic parts that J then uses in manufacturing the aquariums. The specialized recycling equipment is primarily used in recycling, a qualified activity, so that it is treated as qualified property.

EXAMPLE 11 : Assume the same facts as in EXAMPLE 10, except that J does not use postconsumer waste, but instead converts its own manufacturing waste (generated by the construction of plastic aquarium parts) into finished aquarium parts. J may include as qualified property the equipment used to convert the waste resulting from J's manufacturing process into the aquarium parts.

EXAMPLE 12: V, a qualified taxpayer, manufactures explosives in Barstow. V's research team attempts through research and experimentation to create a new process for making explosives that can be more easily detected by standard metal detectors. Due to the high danger associated with testing and manufacturing the explosives, V constructs an explosion containment chamber to both conduct the research and to insert fuses into the explosives being manufactured by V. Assume that during the 12-month period following the date the explosion containment chamber was placed in service in California by V that it was used 60% of the time to conduct research, and 40% of the time to insert the fuses into the manufactured explosives. Assuming the explosion containment chamber is tangible personal property defined in Internal Revenue Code Section 1245(a) (3) (A), and assuming V's research is described in Internal Revenue Code Section 174 or the regulations thereunder, V may treat the explosion containment chamber as qualified property.

EXAMPLE 13: W, a qualified taxpayer, manufactures engines for propeller airplanes in Long Beach. W constructs two engine test stands. The first engine test stand is used to evaluate design enhancements to the engines manufactured by W. Assuming this first engine test stand is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A), and assuming W's research activity is described in Internal Revenue Code Section 174 or the regulations thereunder, W may treat the first engine test stand as qualified property because it is used in research and development. The second test stand is used to evaluate and test assembled engines prior to their shipment to customers. Assuming this second test stand is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A), W may treat the second engine test stand as qualified property because it is used as part of W's manufacturing process.

EXAMPLE 14: X, a qualified taxpayer, manufactures garden and lawn fertilizer products in Arcata. One of the by-products of X's manufacturing process is a large volume of highly alkaline water. This water is considered waste water by the local water quality control agency that has jurisdiction over the discharge of waste water. To comply with the local waste water discharge standards, which are assumed for purposes of this example to exceed any applicable federal standards, X purchases equipment to reduce the alkalinity of the waste water so that it can be first reused in X's manufacturing process and then treated for discharge into local evaporative ponds. Since the waste water treatment equipment treats the waste water to meet or exceed the local agency's standards, X may include as qualified property the equipment purchased for treating the waste water since it is used in pollution control, a qualified activity.

EXAMPLE 15 : E, a qualified taxpayer, manufactures metal barrels and drums in Richmond. E purchases an electric welder which is qualified property and a portable diagnostic computer for regular and/or non-regular testing of the welder. E may include as qualified property the diagnostic computer since it is used primarily to maintain, repair, measure, or test the welder.

EXAMPLE 16: F, a qualified taxpayer, manufactures aluminum die-casting equipment in Bakersfield. F purchases a laser micrometer measuring device to periodically check the alignment of extruders which are assumed to be qualified property. F may include as qualified property the laser micrometer measuring device since it is used primarily to measure the extruding equipment.

EXAMPLE 17: G, a qualified taxpayer, manufactures motor vehicle parts in Van Nuys. G purchases a specialized wrench set to be used primarily for repair of G's specialized extruding press that is used by G in its manufacturing process. Since G uses the wrench set primarily on qualified property, G may include the wrench set as qualified property.

EXAMPLE 18: H, a qualified taxpayer, manufactures elevators in Hayward. H purchases a standard electronic multi-tester. During the 12-month period following the date the electronic multi-tester was placed in service in California by H, the multi-tester is used 30 percent of the time to test electrical equipment which is qualified property, and the remainder of the time H used the multi-tester to test the electrical system of its fleet of vehicles which are used by senior management personnel. Under these facts, assuming that the vehicles are not qualified property, H may not include as qualified property the multi-tester since it is not primarily used for the testing of qualified property.

(c) Special Purpose Buildings and Foundations . In the case of any qualified taxpayer that is engaged in a manufacturing activity described in SIC Codes 3571-3579, inclusive (computer and office equipment), SIC Codes 3671-3679, inclusive (electronic components and accessories), an activity related to biotechnology described in SIC Code 8731 (commercial physical and biological research), a biopharmaceutical activity described in SIC Codes 2833-2836, inclusive (drugs), those activities related to space vehicles and parts decried in SIC Codes 3761-3769, inclusive, those activities related to space satellites and communications satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to “qualified property” that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to “qualified property” that is placed in service on or after January 1, 1997), qualified property also includes special purpose buildings and foundations, or any portion thereof, that are used in any of the above-described SIC Code activities and which satisfy the other requirements of this subsection of this regulation.

(1) Defined. For purposes of this regulation, the term “special purpose building and foundation” shall mean an entire building, or any portion of any building, and the foundation immediately underlying such building, or any portion of such foundation, that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the qualified purpose. A building shall be treated as specifically designed and constructed or modified for a qualified purpose if it is not economic to design and construct the building for the intended purpose and thereafter use the building for a different purpose.

(2) Exclusive Use for a Qualified Purpose . A special purpose building will be treated as being used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use for a non-qualified purpose is permissible. Incidental use means a use which is both related and subordinate to the qualified purpose. For purposes of this regulation, it will be conclusively presumed that a use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualified purpose. In the event an entire building does not qualify as a special purpose building, a qualified taxpayer may establish that a portion of a building, and the foundation immediately underlying such portion, qualifies for treatment as a special purpose building and foundation if such portion satisfies all of the definitional provisions of Revenue and Taxation Code Section 17053.49 and this subsection of this regulation. To the extent that a building is not a special purpose building as defined in this regulation, but a portion of the building qualifies for treatment as a special purpose building, then all equipment which exclusively supports the qualified purpose occurring within that portion and which would qualify as Internal Revenue Code Section 1245 (a) (3) (A) property if it were not a fixture or affixed to the building shall be treated as a cost of the portion of the building which qualifies for treatment as a special purpose building.

(3) Property Which is not a Special Purpose Building and Foundation. Buildings and foundations which do not meet the definition of a special purpose building and foundation include, but are not limited to:

A. buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building;

B. research facilities that are used primarily prior to and after, or prior to or after, the manufacturing process; or

C. storage facilities that are used primarily prior to and after, or prior to or after, completion of the manufacturing process.

(4) Research Facilities. A research facility shall not be considered to be primarily used prior to and after, or prior to or after, completion of the manufacturing process if its purpose and use relate exclusively to the development and regulatory approval of the manufacturing process for specific biopharmaceutical products. A research facility which is used primarily in connection with the discovery of an organism from which a biopharmaceutical product or process is developed does not meet the requirements of Revenue and Taxation Code Section 17053.49 and the preceding sentence and is not to be considered used in the manufacturing process.

EXAMPLE 1: K, a qualified taxpayer, manufactures medicinal antiseptics (SIC Code 2834) in Fairfield. K constructs a 5,000 square foot “clean room” for the purpose of manufacturing sterile antiseptics, a product that requires, under applicable federal Food and Drug Administration criteria, absolute sterility and controlled humidity in the manufacturing environment. The “clean room” is not economic to design for any other purpose other than manufacturing medicinal antiseptics. While the clean room and its foundation appear to satisfy the definition of a special purpose building and foundation, K may not include as qualified property the clean room and its foundation because K, while in a line of business described in SIC Codes 2830-2836, inclusive, is not a biopharmaceutical establishment. If, however, the antiseptic is a biopharmaceutical product, then the special purpose building and foundation may be qualified property.

EXAMPLE 2: L, a qualified taxpayer, owns a 40,000 square-foot warehouse facility in Santa Clara. L modifies part of the facility to manufacture computer microprocessors, which is an activity described in SIC Code 3674. A portion of this microprocessor manufacturing is to be done in a “clean room” since the microprocessors must be manufactured with specialized equipment which is sensitive to air, humidity and pollutants in order to ensure the economic value of the microprocessors. Although the entire 40,000 square foot building is not a special purpose building, the portion of the building which is used as the “clean room” and the cost of its ancillary support equipment is treated as a special purpose building under this regulation because the equipment used therein has a special purpose which can only be achieved in the “clean room.”

EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except the “clean room” is used merely for long-term storage of the finished product where a controlled environment will greatly extend the shelf life of the product. The “clean room” is not being used in the manufacturing process since it only serves a storage function and thus the “clean room” is not treated as a special purpose building.

EXAMPLE 4: M, a qualified taxpayer, manufactures typewriters (SIC Code 3579) in Chatsworth. M specially designs and constructs a building for the purpose of housing and supporting a high-powered, high-speed hydraulic press for the production of precision carriages. It is not economic to design the building for any other purpose. The building requires heavily reinforced foundational pilings with strategically located floor pylons for anchoring the press. In addition, the walls and ceiling of the building have many integral permanent features to accept the size, shape, plumbing, and electrical needs of the press. Even though the building may be viewed as “specifically designed and constructed for a qualified purpose,” it would not be treated as a special purpose building because the equipment has no “special purpose” and the building is merely a general purpose manufacturing building.

EXAMPLE 5: N is solely engaged in performing commercial research and development for biotech companies (SIC Code 8731) in Palo Alto. N constructs a special purpose building for the purpose of conducting its commercial research and development activities. Although the building may otherwise be a special purpose building, N may not claim the MIC because N is not a qualified taxpayer under Regulation 17053.49-3.

EXAMPLE 6: P, a qualified taxpayer, is engaged in two lines of business: manufacturing computer terminals (SIC Code 3575) and performing commercial research and development for biotech companies (SIC Code 8731). P constructs a special purpose building for the exclusive purpose of conducting research in connection with its commercial research and development activity for biotech companies. The special purpose building and foundation would be qualified property even though P is only conducting research in the building. However, if P instead uses the research building in connection with its manufacturing activity, the building is no longer qualified property since the use of the building is now a part of a research facility used prior to and after, or prior to or after, the manufacturing process, and thus used for a non-qualified purpose under this regulation.

EXAMPLE 7 : Assume the same facts as in EXAMPLE 6, except that P is also engaged in manufacturing a new type of blank computer software disks (SIC Code 3695) that require an environment that only the highest level of “clean rooms” can provide, and that P constructs such a “clean room” for the sole purpose of manufacturing the disks. Although P is a qualified taxpayer that may claim the MIC with respect to certain special purpose buildings and foundations, and notwithstanding the fact that the “clean room” otherwise meets the definition of a “special purpose building and foundation,” P's “clean room” that is used to manufacture the blank disks does not qualify as a special purpose building and foundation for purposes of the MIC because the activity being conducted in the “clean room” is properly classified under SIC Code 3695, which is not one of those SIC Code activities that entitles a qualified taxpayer to the MIC for their special purpose buildings and foundations.

(d) Specifically Excluded Property. Notwithstanding subsection (b), (c), (e) or (f) of this regulation, qualified property does not include any of the following:

(1) Furniture. Any item of furniture, regardless of how used or where located.

(2) Facilities Used for Warehousing Purposes. Any property used for warehousing purposes after completion of the manufacturing process. Thus, for example, a manufacturer of engine components that stores its finished products in a separate warehouse building prior to shipment and thereafter uses forklifts and other heavy equipment to move the inventory within the warehouse building shall not treat the forklifts and other heavy equipment as qualified property.

(3) Inventory. Any property that is properly treated as inventory of the qualified taxpayer. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory under Internal Revenue Code Section 263A or that is described in Internal Revenue Code Section 1221(1).

(4) Equipment Used in the Extraction Process. Any equipment used in the extraction process. Thus, for example, drill bits, rigging, and pumps used in wells and mines to extract oil, water or minerals shall not be treated as qualified property since this is equipment used in the extraction process.

(5) Equipment Used to Store Finished Products . Any equipment used to store finish products that have completed the manufacturing process. Thus, for example, if a qualified taxpayer primarily uses a forklift in the finished goods portion of its manufacturing plant to transport finished products to its loading dock for shipping to customers, the forklift would not be qualified property. On the other hand, if the forklift was primarily used to transport raw materials to the assembly line and was occasionally used to transport finished products to the loading dock for shipment to customers, the forklift would be treated as qualified property.

(6) Tangible Personal Property Used in Administration, General Management, or Marketing. Any tangible personal property that is used in administration, general management, or marketing. For this purpose, an item of property that is used both in a qualified activity and for administration, general management, or marketing, shall be treated as qualified property only if the item is primarily used in a qualified activity. However, property primarily used in to clean and maintain the factory floor and fire safety equipment primarily used on the factory floor are not considered tangible personal property used in administration, general management, or marketing.

(7) Property for Which the California Low-Emission Vehicle Credit is Claimed. Any property for which the qualified taxpayer has claimed the low-emission vehicle credit provided in Revenue and Taxation Code Sections 17052.11 and 23603.

(e) Movement of Used Property Into This State. In any case where property is moved from another state or country into this state by a qualified taxpayer or by a lessor who intends to lease such property to a qualified taxpayer, the property may generally be treated as qualified property for purposes of the MIC if it satisfies the other requirements of this regulation. Thus, for example, if an item of property is acquired and placed in service in Nevada in 1994, and thereafter the item of property is moved into this state for use in a qualified activity (as defined in Regulation 17053.49-5 (b)), the property may generally be treated as qualified property. However, in the case of any such moved property, a qualified taxpayer or lessor must still satisfy the requirements of Regulation 17053.49-4 (related to qualified costs and payment of California sales or use tax) in order to claim the MIC.

(f) Property Used to Refine “Reformulated” or “Oxygenated” Gasoline. In the case of any qualified taxpayer engaged in refining activities properly classified in SIC Code 2911, “qualified property” also includes other tangible property that is defined in Section 1245(a) (3) (B) of the Internal Revenue Code and that satisfies each of the following requirements:

(A) is used in that line of business properly classified in SIC Code 2911;

(B) is primarily used in refining; and

(C) is used to produce “reformulated gasoline” or “oxygenated gasoline”, as defined in and pursuant to the requirements imposed by Section 219 of Public Law 101-549, relating to certain amendments to Section 211 of the federal Clean Air Act, and, on or after Section 211 of the federal Clean Air Act, and, on or after March 1, 1996, is used principally to produce gasoline that meets the California Air Resources Board standards set forth in Title 13, Division 3, Chapter 5, Article 1, Subarticle 2, California Code of Regulations (as in effect on February 1, 1996).