(1) Tangible Personal Property. For purposes of this section, property must be tangible personal property. 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 are 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 JSF Property Credit.

EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft engines 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 are 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)(3)(A) Property. Only personal property described in Internal Revenue Code section 1245(a)(3)(A) is treated as qualified property for purposes of the JSF Property Credit. Other tangible property that is described in Internal Revenue Code sections 1245(a)(3)(B) through (F) is not “personal” property and is thus not qualified property under Revenue and Taxation Code section 17053.37.

EXAMPLE 1: F, a qualified taxpayer, manufactures airplane fuselages. F constructs a building which is open at both ends through which a length of track travels to move the fuselages 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 fuselages. 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 to Manufacture a Product for Ultimate Use in a Joint Strike Fighter. Property must be used in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. This requirement will be satisfied if the qualified taxpayer is using the qualified property primarily to manufacture a product that is properly treated as inventory of the qualified taxpayer and that is physically installed in or attached to a Joint Strike Fighter aircraft. For this purpose, the term “inventory” includes any property that 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).

EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft radar antennas that are attached to a Joint Strike Fighter. B constructs a compressor for use in B's assembly line. B uses the compressor exclusively to manufacture the antennas. Since B uses the compressor to manufacture a product that is physically attached to a Joint Strike Fighter aircraft, the compressor is primarily used in a qualified activity.

EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B manufactures ground based radar equipment to be used in connection with the Joint Strike Fighter program. Under these facts, even though the radar equipment is being manufactured in connection with the Joint Strike Fighter program, the compressor is not used in qualified activities since the compressor is used to manufacture a product that is not physically attached to a Joint Strike Fighter aircraft.

(4) Primarily Used in Qualified Activities. Property must be primarily used in qualified activities.

EXAMPLE 1: B, a qualified taxpayer, manufactures avionics systems 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 activities, 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 activities 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 aircraft communications 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 aircraft instrument lights 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 (assuming it was not used more than 50 percent of the time to unload the raw material from the trucks to the receiving area) 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: T, a qualified taxpayer, manufactures copper 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 wire and thus would be qualified property.

EXAMPLE 7: 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 wire is complete upon its being wrapped in the 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 such 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 8: C, a qualified taxpayer, manufactures hydraulic lines in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured lines following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the direct 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 9: C, a qualified taxpayer, manufactures ground based radar equipment and radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft. C purchases a compressor to use on its assembly line. The compressor is used for a total of 500 hours on the assembly line, 300 hours to manufacture the radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft and 200 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities 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 (300 hours/500 hours, or 60%), the compressor is primarily used in a qualified activity.

EXAMPLE 10: Assume the same facts as in EXAMPLE 10, except the compressor is used 200 hours to manufacture the radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft and 300 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities for less 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 (200 hours/500 hours, or 40%), the compressor is not primarily used in a qualified activity.

(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 to Store Finished Products. Any equipment used to store finished 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.

(5) 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 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.