Was an insurance company's California purchase of labels taxable when title passed to it outside the state?

Plain-English summary

The insurance company ordered labels through the seller's California sales office, but the labels were manufactured outside California and delivered to a common carrier there. Assuming the contract said nothing about title, California treated title as passing outside the state when the seller completed carrier delivery.

That meant the transaction was not a California retail sale subject to sales tax. Instead, use tax ordinarily applied to the purchaser's California use. Because the purchaser was assumed to be an insurance company subject to California's gross-premiums tax in lieu of other taxes, Regulation 1567(b) exempted its use of the labels.

The distinction mattered because the insurance-company protection applied to use tax imposed on the insurer, not to sales tax imposed on a retailer. If title had passed in California and sales tax applied, the sale would not have been exempt merely because the buyer was an insurer.

Common questions

Did ordering through a California sales office make the sale taxable here?

No. On the stated facts, title passed outside California upon delivery to the common carrier.

Would the answer be the same if sales tax applied?

No. The opinion said a retailer's sales-tax liability was not exempted by the purchaser's insurance-company status.

Citations and references

• California Revenue and Taxation Code sections 6051, 6201, 6401, and 12102 (as cited)
• California Civil Code section 1656.1 and Commercial Code section 2401 (as cited)
• California Sales and Use Tax Regulations 1567(b), 1620(a)(1), and 1628(b)(3)(D) (as cited)

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/135-0355.pdf

Original ruling text

135.0355
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE: (916) 324-2614
FAX : (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

March 27, 1997
Ms. REDACTED TEXT
Re:

KATHLEEN CONNELL
Controller, Sacramento
___
JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_____
E. L. SORENSEN, JR.
Executive Director

Company REDACTED TEXT
Account No. REDACTED TEXT

Dear Ms. REDACTED TEXT:
This is in response to your letter dated January 27, 1997, regarding the application of tax to the sale of labels by Company REDACTED TEXT to Aurora National Life Assurance Company (“ANLAC”). You state: “Company REDACTED TEXT is registered to collect sales/use tax within California. We also have sales offices, and warehousing locations within your state. Data Documents is in the business of manufacturing computer paper, cards, labels, business forms, etc. We have no manufacturing locations in California. “We are selling labels to Aurora National Life Assurance Company. Aurora National Life Assurance Company is licensed as an insurance company in the State of California. “The problem arises when Aurora National Life Assurance Company contacts our City of Industry sales office to order labels. A Data Documents employee takes the order and arranges for the manufacture and delivery of these labels. The labels are manufactured at our Texas location and then shipped to Aurora National Life Assurance Company in California.” DISCUSSION Retail sales of tangible personal property in California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code
§ 6051.) Although the retailer owes the sales tax, the retailer may collect sales tax reimbursement from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for the storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.)

Ms. REDACTED TEXT

-2-

March 27, 1997
135.0355

However, insurance companies doing business in this state are liable for an annual tax imposed by California Constitution Article XIII, Section 28, in lieu of all other taxes and licenses upon such insurers and their property, with certain exceptions not applicable herein. (See Rev. & Tax Code § 12102.) Thus, if the applicable tax in the present case is the use tax, ANLAC’s use of the labels would be exempt from tax because the use tax is imposed on the purchaser. (Reg. 1567(b).) On the other hand, if the applicable tax is the sales tax, the sale to ANLAC would not be exempt from tax because the sales tax is imposed on the retailer and not the purchaser. (Id.) Sales and Use Tax Regulation 1620(a)(1) provides that if title to the property sold passes to the purchaser at a point outside this state, sales tax does not apply, regardless of the extent of the retailer’s participation in California in relation to the transaction. If the contract of sale is silent as to the passage of title, title passes from the seller, and thus the sale occurs, no later than the time at which the seller completes its performance with respect to the physical delivery of the property. (See Cal. U. Com. Code § 2401; Reg. 1628(b)(3)(D).) This generally occurs upon the seller’s delivery of the property to a common carrier for shipment to the customer. (Id.) In the present case, our understanding is that ANLAC orders the labels from Company REDACTED TEXT’s City of Industry sales office. The labels are then manufactured and delivered from an out-of-state location via common carrier to ANLAC. We further assume that the contract of sale is silent as to the passage of title. Under these circumstances, title to the labels passes to ANLAC outside of California at the time and place Company REDACTED TEXT delivers the labels to a common carrier for shipment to ANLAC. Accordingly, because the sale takes place outside of California, the use tax, rather than the sales tax, applies. Therefore, assuming that ANLAC is an insurance company doing business in this state, ANLAC’s use of the labels in California is exempt from use tax. If you have any further questions, please write again. Sincerely,

Sophia H. Chung
Tax Counsel
SHC:rz
REDACTED TEXT.ltr

cc:

Out-of-State District Administrator (OH)