California locks in Tesla sedan plant with tax deal

A Tesla Roadster electric car is recharged during a demonstration in Rome October 28, 2009.

LOS ANGELES (Reuters) - California struck a tax incentive agreement with Tesla on Wednesday to ensure that the electric vehicle maker builds its sedan production facility in the state, possibly in the Los Angeles area.

Governor Arnold Schwarzenegger's office said a state agency will temporarily hold title of $320 million worth of equipment to be purchased by Tesla and will not pay the sales tax on the transaction.

That tax arrangement will allow Tesla to save more than 9 percent of the total cost of equipment purchases.

Tesla will use $238 million to set up a production facility for the Model S sedan, the next model for the Silicon Valley start-up after the exclusive battery-powered Tesla Roadster sports car.

Although no location has been determined, the Governor's office said potential locations include the cities of Long Beach and Downey, both close to Los Angeles.

Another $59 million will be spent to upgrade Tesla's Palo Alto powertrain production facility.

The California tax deal comes after the U.S. Department of Energy offered Tesla $465 million in low-cost loans for its sedan manufacturing.

(Writing by Mary Milliken; editing by Carol Bishopric)