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Business Taxes Law Guide—Revision 2024
Sales and Use Tax Annotations
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347.0000 Manufacturing Equipment—Regulation 1525.2
Annotation 347.0677
347.0677 New Trade or Business. Corporation A is an out-of-state manufacturer of food products who is considering building a manufacturing facility in California. It sells a majority of its product to Corporation B, a related company. Both Corporation A and Corporation B are wholly owned subsidiaries of the same foreign corporation. Corporation B, a California corporation, is headquartered in California and has two branch offices located in California. Corporation A is engaged in manufacturing as defined in Code 2035 of SIC. Corporation B is engaged in a wholesale trade as defined in Code 5140 of the SIC manual. Corporation B has production agreements with two unrelated companies X and Y. Corporation B furnishes Company X with a product it purchases from Corporation A. Company X mixes the product with other products which it produces. The resulting bulk mixture is shipped to Company Y which breaks the bulk into smaller packages. The product is then shipped to rented warehouses for distribution and sale. One of Corporation B's employees is responsible to oversee and coordinate the production at Company X. Corporation B does not prepare separate financial statements or employment reports related to this single employee's activities.
Under Standard Industrial Classification (SIC) manual, packaging and repackaging operations of Corporation B are not manufacturing operations generally consisting of the mechanical or chemical transformation of materials or substance into new products (See p. 67 and 68 SIC manual). Therefore, Corporation A is not precluded from qualifying as a new trade or business for purposes of the partial sales and use tax exemption provided under section 6377. Thus, the partial sales and use tax exemption would apply to property purchases by Corporation A for use primarily for manufacturing, processing, refining, fabricating, recycling, research, and development and the repair of qualified property. 4/9/96; 5/9/96.