Cal. Rev. & Tax. Code § 129

“Business inventories” shall include goods intended for sale or lease in the ordinary course of business and shall include raw materials and work in process with respect to such goods. “Business inventories” shall also include animals and crops held primarily for sale or lease, or animals used in the production of food or fiber and feed for such animals.

“Business inventories” shall not include any goods actually leased or rented on the lien date nor shall “business inventories” include business machinery or equipment or office furniture, machines or equipment, except when such property is held for sale or lease in the ordinary course of business. “Business inventories” shall not include any item held for lease which has been or is intended to be used by the lessor prior to or subsequent to the lease. “Business inventories” shall not include goods intended for sale or lease in the ordinary course of business which cannot be legally sold or leased in this state. If goods which cannot be legally sold or leased are not reported by the taxpayer pursuant to Section 441, it shall be conclusively presumed that the value of the goods when discovered is the value of the goods on the preceding lien date.

“Business inventories” shall also include goods held by a licensed contractor and not yet incorporated into real property.