Sonoma County Cannabis Program

Cannabis Business Readiness Guide:
8. Tax Incentives

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EDB Staff works directly with Sonoma County businesses to identify possible tax incentives and provide useful tops on the application process. We helped local business obtain over 5 million in tax credits, exemptions and training subsidies.

Read next: 9. Additional Resources

Partial Exemption for Farm Equipment and Machinery

In general, the sale of farm equipment and machinery is taxable. However, certain sales and purchases of farm equipment and machinery are partially exempt from sales and use tax. As a grower, you may be able to take advantage of this partial exemption.

The partial exemption applies only to the state general fund portion of the sales tax, currently 5.00 %.

To calculate the tax rate for qualifying transactions, subtract 5.00 percent from the sales tax rate that would normally apply at the location where the purchase is made. For example, if the current tax rate in your area is 9 percent, the tax rate for a qualifying transaction would be 4.00 percent.

Note: The rate for the state general and fiscal recovery funds portion of the sales tax is subject to change. The rates used in this example are for demonstrative purposes only. You must use the rate in effect at the time of the sale. Current tax rates

Three requirements must be met for the partial exemption to apply. The item must be:

  1. Sold to a qualified person.
  2. Used exclusively or primarily (depending on the type of item) in producing and harvesting agricultural products. Primarily means 50 percent or more of the time.
  3. Defined as farm equipment and machinery which includes, but is not limited to, any tool, machine, equipment, appliance, device or apparatus used in the conduct of agricultural operations.

If any of these three requirements is not met, the partial exemption will not apply.

Examples of equipment and machinery that may qualify:

  • Planting equipment
  • Trimming tools
  • Drying racks and trays
  • Grow tents and lights
  • Environmental controls
  • Greenhouses
  • Hydroponic equipment
  • Solar equipment (see below for more information)
  • Irrigation equipment

For more detailed information about equipment and machinery used in farming, see Regulation 1533.1,Farm Equipment and Machinery and publication 66, Agricultural Industry.

Buildings for Raising Plants

Certain buildings may qualify for the partial exemption for farm equipment. The building must be a single-purpose building to house plants, such as a greenhouse.

To qualify for the partial exemption, a horticulture building must be both of the following:

  • Specifically designed for commercially raising plants or mushrooms.
  • Used exclusively for that purpose.

You should issue a partial farming exemption certificate to your vendor when you purchase qualifying items.

Solar Power Facilities

If you qualify for the partial exemption for farm equipment, your purchase of a solar power facility may also qualify.

Solar Power Facility Directly Attached to Farm Equipment and Machinery

When a solar power facility is directly attached to, and primarily provides power to qualifying farm equipment and machinery, the solar power facility generally qualifies as farm equipment and machinery. As such, the purchase of this type of solar power facility generally qualifies for the partial exemption as long as the other requirements for the partial exemption are met.

Solar Power Facility Not Directly Attached to Farm Equipment and Machinery

A solar power facility may also qualify as farm equipment and machinery when the solar power facility is not directly attached to qualifying farm equipment and machinery but is instead tied to the regional power grid and subject to a net metering agreement between the taxpayer and the electric cooperative. In such cases, you need to demonstrate that the solar facility is specifically purchased to provide power primarily to qualifying farm equipment and machinery.

Fuels

Partial Exemption for Diesel Fuel Used in Farming Activities

Most sales and/or purchases of diesel fuel are taxable. However, a partial sales and use tax exemption exists for certain sales and purchases of diesel fuel used in farming activities.

The partial exemption applies to the sale or purchase of diesel fuel only if the diesel meets the following two requirements:

  • Be a type of diesel that qualifies for the exemption, and
  • Be used in qualifying farming activities or related contract hauling.

For more detailed information about diesel fuel used in farming, see Regulation 1533.2, Diesel Fuel Used in Farming Activities or Food Processing.

Partial Exemption Certificates

When you make a purchase that qualifies for a partial exemption, you must provide an exemption certificate to your supplier.

In order for the certificate to be valid, you must:

  • Timely furnish the certificate to the seller.
  • Provide all relevant information:
    • Your name and address.
    • The type of property being purchased.
    • You or your company's name, title, telephone number, address, and the seller's permit number.
    • Sign and date the document.

An exemption certificate will be considered timely if it is given at any time before the seller bills the purchaser for the property, any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser.

Listed below are the types of exemption certificates you may need:

Manufacturing and Research and Development Exemption

Launched in July 2014, the Manufacturing and Research and Development Tax Exemption offers a partial reduction in state sales and use taxes for certain equipment purchases and leases. 

Effective July 1, 2019, the State of California imposes a statewide sales and use tax rate of 7.25% (plus applicable district tax) on sales and leases of property. With the Manufacturing and Research and Development Tax Exemption, eligible businesses would only pay 3.3125% of the statewide sales and use tax, saving $41.88 for every $1,000 in purchases of qualifying property.

Who Qualifies?

The partial tax exemption is available to businesses in the following North American Industry Classification System (NAICS) business categories: 

  • Manufacturing: NAICS codes 3111–3399
  • BioTech Research and Development: NAICS 541711
  • Physical, Engineering, and life sciences R&D: NAICS 54171

Please note: NAICS codes are selected by the business and no NAICS codes currently apply to cannabis as they are a standard used by Federal statistical agencies and cannabis is still illegal at a federal level.

Therefore, you must choose a NAICS code that closely corresponds to your primary business activity. A list of NAICS codes is available at the US Census Bureau website.  In selecting a NAICS code for cannabis manufacturing, you may was to take a look at 325411 “Medicinal and Botanical Manufacturing.”

What Qualifies?

Certain equipment purchases and leases qualify for the partial sales tax exemption. They can include machinery and equipment; equipment and devices used or required to operate, control, regulate, or maintain the machinery; pollution control items; and certain special purpose buildings and foundations.

Use of Property

To qualify for the exemption, the property must be used 50 percent or more for one of the following activities:

  • Manufacturing, processing, refining, fabricating, or recycling tangible personal property
  • Researching and developing
  • Maintaining, repairing, measuring, or testing any qualified property

Partial Exemption Certificates

There is no need to apply to the Board of Equalization for the exemption. In order to claim this exemption, California manufacturers must supply their vendors with a valid exemption certificate. This is the partial California sales tax exemption certificate for manufacturing and research and development equipment (CDTFA-230-M). This certificate can be found at the California Department of Tax and Fee Administration (CDTFA) website. 

California Competes Tax Credit

The California Competes Tax Credit is an income tax credit designed to help businesses stay in California by encouraging investment and the creation of new well-paying jobs. 

More than $200 million has been set aside by the state annually. In discussions with the Governor’s Office of Business Development Cannabis related business should be able to apply for this award once the state begins offering license in January 2018. 

Detailed information on how businesses can qualify for this tax credit, visit the State of California's California Competes Tax Credit page.

Contact Information

Economic Development Board
County of Sonoma
Business Hours
Monday – Friday
8:00 AM – 5:00 PM
Address
141 Stony Circle
Suite 110
Santa Rosa, CA 95401
38.44011, -122.745706