California Enterprise Zone Tax Credits Denied

California's enterprise zone tax credit is available for machinery parts if they are capitalized, but not if they are expensed in the same year they are bought and used, a state appellate court said March 13 in upholding earlier rulings from a trial court and state tax administrators (Taiheiyo Cement U.S.A. Inc. v. Franchise Tax Board, Cal.Ct.App., No. B226067, opinion filed 3/13/2012).

In a 16-page opinion, a three-judge panel of the Court of Appeal for the Second Appellate District in Los Angeles affirmed a July 2010 ruling from state trial court, and a 2008 ruling from the State Board of Equalization, that Taiheiyo Cement U.S.A. could not claim EZ credits for its machinery parts.

At issue was $4.9 million in taxes, interest, and penalties paid for tax years 1998 and 1999. Taiheiyo argued before SBOE that because its cement plant ran continuously, parts typically meant to last three years were used within one year. It fought the Franchise Tax Board's determination that because the parts were bought and used in the same year, and not capitalized over more than one year, the tax credit could not apply to the parts.

In the opinion, the court said the California Revenue and Taxation Code section that authorizes the credit, which amounts to a credit for sales and use tax paid on the parts, defines “qualified property” with the terms “placed in service” and “basis.” These terms are used generally with respect to capital assets, the court said.