Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Scope of Exemption.
(1) "Business inventories" that are eligible
for exemption from taxation under Section
129
of the Revenue and Taxation Code include all tangible personal property,
whether raw materials, work in process or finished goods, which will become a
part of or are themselves items of personalty held for sale or lease in the
ordinary course of business.
(A) The phrase
"ordinary course of business" does not constitute a limitation on the type of
property which may be held for sale or lease, but it does require that the
property be intended for sale or lease in accordance with the regular and usual
practice and method of the business of the vendor or lessor.
(B) The phrase "goods intended for sale or
lease" means property acquired, manufactured, produced, processed, raised or
grown which is already the subject of a contract of sale or which is held and
openly offered for sale or lease or will be so held and offered for sale or
lease at the time it becomes a marketable product. Property which is ready for
sale or lease must be displayed, advertised or otherwise brought to the
attention of the potential purchasers or lessees by means normally employed by
vendors or lessors of the product.
(2) "Business inventories" includes:
(A) Containers or container material such as
kegs, bottles, cases, twine and wrapping paper, whether returnable or not, if
title thereto will pass to the purchaser or lessee of the product to be sold or
leased therein.
(B) New and used
oak barrels used in the manufacturing process that physically incorporate the
flavor- and aroma-enhancing chemical compounds of the oak into wine or brandy
to be sold, when used for this purpose. However, an oak barrel is no longer
business inventory once it loses the ability to impart the chemical compounds
that enhance the flavor and aroma of the wine or brandy. An "oak barrel" used
in the manufacturing process is defined as having a capacity of 212 gallons or
less. Oak barrels not used in the manufacturing process but held for sale in
the ordinary course of business are also considered business
inventory.
(C) Materials such as
lumber, cement, nails, steel beams, columns, girders, etc., held by a licensed
contractor for incorporation into real property, providing the real property
will not be retained for the licensed contractor's use.
(D) Crops and animals held primarily for sale
or lease and animals used in the production of food or fiber and feed for
animals in either category.
(E)
Space flight property, not operationally reusable, listed in the International
Traffic in Arms Regulations on the United States Munitions List (22 CFR §
121.1), the control over which is
relinquished by the owner upon launch.
(i)
"Space flight" means any flight designed for suborbital, orbital, or
interplanetary travel.
(ii) The
phrase "control over which is relinquished by the owner upon launch" means the
transfer of control to a federal launch safety authority for space flight
termination purposes.
(b) Exclusions. Property eligible for the
"business inventories" exemption does not include:
(1) Property of any description in the hands
of a vendee, lessee or other recipient on the lien date which has been
purchased, leased, rented, or borrowed primarily for use by the vendee, lessee
or other recipient of the property rather than for sale or lease or for
physical incorporation into a product which is to be sold or leased. Examples
of property excluded from business inventories are office supplies, furniture,
machines and equipment and manufacturing machinery, equipment and supplies such
as dies, patterns, jigs, tooling or chemicals used to produce a chemical or
physical reaction, and contractors' supplies, tools, concrete forms, and other
items that will not be incorporated into and become a part of the property.
Also ineligible are materials that a contractor is holding to incorporate into
real property that will be retained for his own use.
(2) Property being used by its owner for any
purpose not directly associated with the prospective sale or lease of that
property.
(3) Property actually
leased or rented on the lien date.
(4) Property which has been used by the
holder prior to the lien date, even though held for lease on the lien
date.
(5) Property intended to be
used by the lessor after being leased or during intervals between leases even
though held for lease on the lien date.
(6) Property in the hands of a lessor who,
with intent to enjoy the benefits of the inventory exemption, had leased the
property for a period that expired shortly before the lien date but who
renewed, extended or renegotiated the lease shortly
thereafter.
(c) Service
Enterprises. Property held by a person in connection with a profession which is
primarily a service activity such as medicine, law, architecture or accountancy
is not "business inventories" held for sale or lease even though such property
may be transferred to a patient or client incidental to the rendition of the
professional service. Property held by enterprises rendering services of a
nonprofessional type such as dry cleaners, beauty shop operators and swimming
pool service companies is to be regarded as "business inventories" held for
sale if such property is delivered as an item regularly included in the
service.
(d) Repairers and
Reconditioners. Persons engaged in repairing or reconditioning tangible
personal property with the intent of transferring parts and materials shall be
regarded as holding said parts and materials as "business
inventories."
(e) Agricultural
Enterprises. Animals, crops and feed held primarily for sale or lease in the
ordinary course of business are included in the term "business inventories," as
are animals used in the production of food or fiber and feed for such animals.
(1) "Animals used in the production of food
and fiber" includes all animals customarily employed in the raising of crops or
for the feeding, breeding and management of livestock, or for dairying, or any
other confined animals whose products are normally used as food for human
consumption or for the production of fiber useful to man. Excluded are animals
held by an owner or lessee principally for sport, recreation or pleasure such
as show animals, horses held for racing or horses and other animals kept as
pets.
(2) The term "crops" means
all products grown, harvested, and held primarily for sale, including seeds
held for sale or seeds to be used in the production of a crop which is to be
held primarily for sale. It does not include growing crops exempted pursuant to
Article XIII, section
3(h), of the
California Constitution or fruit trees, nut trees, and grapevines exempted by
section
223
of the Revenue and Taxation Code.
(3) The term "food" means property normally
considered as food for human consumption.
(4) Feed for animals held primarily for sale
or lease or for animals used in the production of food or fiber constitutes
"business inventories" subject to exemption. It includes every type of
natural-grown or commercial product fed to animals except medicinal commodities
intended to prevent or cure disease unless the medicinal commodities are
purchased as a component part of feed for such animals.
1. New
section filed 11-21-68; effective thirtieth day thereafter (Register 68, No.
44).
2. Amendment of subsections (a), (b) and (f) filed 1-9-70;
effective thirtieth day thereafter (Register 70, No. 2).
3.
Amendment filed 1-19-71; effective thirtieth day thereafter (Register 71, No.
4).
4. Amendment filed 2-18-75; effective thirtieth day thereafter
(Register 75, No. 8).
5. Amendment filed 10-15-80; effective
thirtieth day thereafter (Register 80, No. 42).
6. Amendment of
subsection (b) filed 1-22-85; effective thirtieth day thereafter (Register 85,
No. 4).
7. Amendment of subsection (a)(1), redesignation of former
subsections (a)(2)-(3) as subsections (a)(1)(A)-(B), and new subsections
(a)(2)-(a)(2)(D) filed 6-26-2000; operative 7-26-2000 (Register 2000, No.
26).
8. Change without regulatory effect amending subsection (c)
filed 4-6-2001 pursuant to section
100, title 1, California Code of
Regulations (Register 2001, No. 14).
9. Editorial correction of
subsection (a)(1) (Register 2002, No. 43).
10. New subsections
(a)(2)(E)-(a)(2)(E)(ii) filed 8-21-2014; operative 10-1-2014 (Register 2014,
No. 34).
Note: Authority cited: Section
15606,
Government Code. Reference: Sections
129
and
219,
Revenue and Taxation Code.
