Did an insurer's exemption stamp protect vendors that shipped its purchases from California warehouses?

Plain-English summary

An insurance company stamped its purchase orders to say it took title when the seller delivered merchandise to a common carrier outside California. The stamp correctly described why an out-of-state shipment to the insurer could avoid sales tax and why the insurer's in-lieu protection could eliminate use tax.

The two vendors actually shipped typewriters from their California warehouses, either directly to the insurer or through an independent California dealer. Regulation 1620(a)(2)(A) made those California-origin shipments subject to sales tax regardless of whether the contract required or contemplated delivery from outside the state.

Because the vendors knew where their own shipments began, counsel said they could not accept the insurer's stamp in good faith and remained liable for sales tax. But the Board could not use Revenue and Taxation Code section 6421 or Regulation 1667(b)(2) to bill that tax to the insurer, whose property was protected by the constitutional in-lieu provision on the stated insurance-business facts.

Common questions

Would the stamp have worked if the vendors shipped from outside California?

The memorandum said the described out-of-state shipment would be exempt from use tax whether delivered directly to the insurer or through the independent dealer.

Could the vendors shift their sales-tax liability to the insurer?

No. Counsel treated the vendor as liable and said the Board could not impose that sales tax on the insurer under the cited certificate rule.

Citations and references

• California Constitution article XIII, section 28 (insurer in-lieu tax, as cited)
• California Revenue and Taxation Code section 6421 (purchaser liability based on an exemption certificate, as cited)
• California Sales and Use Tax Regulation 1620(a)(2)(A) (California-origin shipment, as cited)
• California Sales and Use Tax Regulation 1667(b)(2) (written exemption certification, 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/135-0370.pdf

Original ruling text

135.0370
State of California

Board of Equalization

Memorandum
To:

Ms. Velma Gregory – Van Nuys Auditing

From:

John Abbott, Tax Counsel

Subject:

Insurance company exemption certificate – liability for sales tax

Date:

August 23, 1988

In your June 20, 1988 memo to Mr. John Adamo, which was referred to me for reply, you enclosed two examples of REDACTED TEXT Company’s purchase orders and vendors’ sales invoices, and asked for our opinion on whether these transactions are taxable or exempt. The two vendors in these examples are REDACTED TEXT and REDACTED TEXT 2. In both cases, the product sold was a typewriter, presumably for use in REDACTED TEXT’s insurance business as an insurer and not for purposes unrelated to REDACTED TEXT’s insurance business. Also in both cases, the vendor shipped the typewriter to an independent dealer located in California, and the dealer delivered the type writer to REDACTED TEXT’s office in California. (The vendors’ sales are at retail to REDACTED TEXT, and are not sales for resale to the independent retailer). In both cases, REDACTED TEXT included a stamp on its invoice which reads as follows: “SALES & USE TAX NOTE “Life insurance companies pay a premium tax ‘in lieu’ of other taxes including the California Use Tax. REDACTED TEXT takes title to the merchandise purchased under this order upon delivery by seller to common carrier outside California. Sales tax is not applicable and our exemption from Use Tax applies. Neither tax should be billed to us.” In our telephone discussion on August 11, 1988, your question was how we should treat these sales in a situation where the vendor did not in fact ship the typewriter from an out-of-state location, but rather shipped the typewriter from its own California warehouse, either directly to REDACTED TEXT or to the California dealer for redelivery to REDACTED TEXT. We agreed that if the typewriter is shipped from the vendors’ out-of-state location, then it is a transaction which is exempt from use tax as described by the sales and use tax note stamped on REDACTED TEXT’s invoices, whether the typewriter is shipped to the independent dealer or to REDACTED TEXT in California. Your question concerns the validity of the sales tax exemption claimed by REDACTED TEXT when the vendor ships the property from its California warehouse. REDACTED TEXT does not specify that the property must be shipped from an out-of-state location, and may even be unaware that the property is shipped from a California location of the retailer. You wonder whether Revenue and Taxation Code Section 6421 and Regulation 1667(b)(2) apply to this situation. Regulation 1667(b)(2) states that if the purchaser certifies in writing to the seller that the property will be used in a manner or for a purpose entitling the seller to regard the

Ms. Velma Gregory

-2-

August 23, 1988
135.0370

sale as exempt from the sales tax, and uses the property in some other manner or for some other purpose, the purchaser is liable for payment of sales tax as if he were the retailer making the retail sale. In both of these cases, the vendors have accepted the sales and use tax note on REDACTED TEXT’s invoices as a valid exemption certificate, and have regarded the sales as exempt from both the sales tax and the use tax. Opinion Our opinion is that under the circumstances you relate, the sales tax applies to the sale of the typewriters from the vendors to REDACTED TEXT since the shipments were made from the vendors’ California locations either to the California dealer or directly to REDACTED TEXT. (Regulation 1620(a)(2)(A)). It is not possible in this situation for the vendors to have accepted REDACTED TEXT’s exemption certificate stamp in good faith, since the vendors knew that the shipments were made from their California warehouses. While REDACTED TEXT sales and use tax not is legally correct in all respects, it simply does not apply to the actual facts of these transactions. Under Regulation 1620(a)(2)(A), sales tax applies to these in-state shipments regardless of whether the contract requires or contemplates delivery from out of state. Accordingly, the vendors cannot rely on this exemption certificate in order to relieve them of the liability for the sales tax. In any case, the Board cannot bill REDACTED TEXT for sales taxes due under Section 6421 and Regulation 1667(b)(2). As expressed in its sales and use tax note, REDACTED TEXT pays an ‘in lieu’ insurers’ tax to the state rather than sales tax. Article XIII, section 28 of the California Constitution specifies that the tax is in lieu of all other state and local taxes (with certain exceptions not relevant here). The Board has no authority to interpret Section 6421 as imposing the sales tax on REDACTED TEXT, in light of the express prohibition of Article XIII, Section 28, on the purchase of property used by REDACTED TEXT in its insurance business. JA:jb