In which secured-property sale arrangements was a bank the seller responsible for collecting use tax?

Plain-English summary

The bank was responsible for collecting use tax in three arrangements where counsel treated it as the seller:

• The borrower delivered mortgaged property to the bank, consented to sale, and the bank sold it and applied the proceeds to the debt.
• The bank conducted a legally noticed pledgee sale and sold the pledged property.
• The borrower delivered property on which the bank had no lien and asked the bank to sell it as agent and apply the proceeds to the debt.

The bank was not the seller when the borrower sold an equity interest and the buyer assumed the debt, when the borrower sold subject to the lien and paid off the bank, or when the bank merely found the buyer and handled a sale in which the borrower transferred title. A court officer, not the bank, was the seller in the foreclosure-sale scenario.

For borrower-made sales, the source said the borrower was liable if it qualified as a seller or retailer under the Sales and Use Tax Law.

Common questions

Did finding the purchaser make the bank the seller?

No. In the third scenario, the borrower still exercised the power to transfer beneficial title.

Was the bank the seller at a pledgee sale it conducted?

Yes.

Who was the seller in a court foreclosure sale?

The court officer, not the bank.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0080.pdf

Original ruling text

135.0080
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

February 21, 1956
REDACTED TEXT
Dear Mr. REDACTED TEXT:
This is in answer to your letter of January 11 addressed to Mr. Harry L. Say, Sales Tax Administrator. You enumerate seven transactions involving the sale of tangible personal property and request our opinion as to the Bank’s liability for collection of the use tax in each transaction. For clarity we shall repeat these transactions followed by our comments:

1. The borrower sells his equity in property, which has been mortgaged or pledged
   to the Bank as security for a loan, to a third party who assumes the unpaid balance of the obligation to the Bank.
2. The borrower sells the mortgaged or pledged property to a third party subject
   to the mortgage or pledge and the Bank releases its claim under the mortgage or pledge upon receipt of payment of the obligation to it.
3. Same as 2 except that the Bank finds the purchaser and the sale from the
   borrower to the purchaser is handled by a Bank officer.
4. The borrower delivers the mortgaged property to the Bank and consents to its
   sale. The Bank then sells the property to a third party, applies the proceeds to the debt and delivers the balance, if any, to the borrower.
5. The Bank holds a pledgee sale, after legal notice, and sells the pledged property
   to a third party at such sale. The proceeds are applied to the debt and the balance, if any, is delivered to the borrower.
6. The mortgaged property is sold to a third party at a sale conducted by a Court
   officer in a foreclosure proceeding and the proceeds are delivered to the Bank in payment of the debt.
7. The borrower delivers property to the Bank upon which the Bank has no lien
   and requests the Bank to sell the property for him and apply the proceeds on the debt. The Bank then sells the property to a third party, as agent for the borrower who is the owner of the property and applies the proceeds on the debt.

REDACTED TEXT

-2-

February 21, 1956
135.0080

In our opinion the Bank is liable for the collection of the use tax from customers in transactions numbered 4, 5 and 7. In each of these transactions the Bank appears to be the seller. In transaction number 6 the sale is by a court officer and in cases 1, 2 and 3, the original owner (borrower) is the seller. He is liable for the tax if he qualifies as a seller or retailer under the terms of the Sales and Use Tax Law. Although in case number 3 the Bank finds the purchaser it appears that the borrower actually makes the sale in the sense that he has, and exercises, the power by his own act to transfer beneficial title to the purchaser. Very truly yours, E. H. Stetson Tax Counsel EHS:ds cc:

San Francisco -Compliance