For California sales tax, should section 1031 exchange equipment be valued at original cost, book value, or negotiated exchange value?

Plain-English summary

The requester identified three possible equipment values in a federal section 1031 exchange: original cost, net book value, and exchange value. California counsel explained that federal nonrecognition did not prevent the tangible-property exchange from being a “sale” for sales-and-use-tax purposes.

Gross receipts included the total sale price valued in money, whether the seller received money or other property. They also included any amount the seller credited to the purchaser.

The proper measure was therefore the realistic exchange value negotiated by the parties in an arm's-length transaction, not automatically original cost or net book value.

Common questions

Did federal section 1031 treatment exempt the exchange from California sales tax?

No. The letter treated the exchange as a sale under California's separate definition.

Which of the three proposed values controlled?

The negotiated realistic exchange value in an arm's-length deal.

Citations and references

• Internal Revenue Code section 1031 (federal nonrecognition exchange, as cited)
• California Revenue and Taxation Code section 6006(a) (exchange or barter as a sale, as cited)
• California Revenue and Taxation Code section 6012(a) and (b)(3) (gross receipts and seller credit, as cited)
• California Revenue and Taxation Code sections 6051 and 6201 (sales and use tax, 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/140-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/140-0007.pdf

Original ruling text

140.0007

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485

December 16, 1991

R--- E. M--Certified Public Accountant
XXXX --- --- Avenue
--- ---, CA XXXXX
Re:

R--- E. & D--- D. F--SR -- XX-XXXXXX
Exchange values

Dear Mr. M---:
This is in response to your letter of November 15, 1991, requesting our opinion with respect to the appropriate method of establishing the value for sales and use tax purposes of tangible personal property transferred pursuant to Internal Revenue Code Section 1031. You presented the issue as follows: “Our question centers on the basis for sales tax purposes of tangible personal property transferred pursuant to the exchange. At the time of the exchange, the three readily ascertainable values for the equipment are original cost, net book value and exchange value. Which of these three values should be used when applying sales and use tax to the transaction?” Sales and use Tax – General Discussion Except to the extent specifically excluded or exempted by statute, the Sales and Use Tax Law, California Revenue and Taxation Code (Section 6001 et seq.) imposes sales or use tax on the gross receipts from the retail sale of all tangible personal property sold or purchased for use in this state. (Sections 6051 and 6201). (All statutory citations are to the California Revenue and Taxation Code, unless otherwise noted herein.)

Mr. R--- E. M---

-2-

December 16, 1991
140.0007

Exchange
An exchange is a sale pursuant to section 6006(a) which provides: “‘Sale’ means (a) any transfer of title or possession, exchange or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. ‘Transfer of possession’ includes only transactions found by the board to be in lieu of a transfer of title, exchange or barter.” Gross Receipts “Gross Receipts” is an all-encompassing concept. Except to the extent specifically excluded or exempted by statute, all gross receipts from the retail sale of tangible personal property sold or purchased for use in this state are subject to sales or use tax. Section 6012 provides in relevant part: “(a) ‘Gross receipts’ means the total amount of the sale or lease or rental price, as the case may be, of the retail sales or retailers, valued in money, whether received in money or otherwise…. “(b) The total amount of the sale or lease or rental price includes all of the following:
…(3) Any amount for which credit is allowed by the seller to the purchaser….” In this case, it is our opinion that the amount of taxable gross receipts would be determined by the realistic exchange value as negotiated by the parties in an arms length transaction. This is the “amount for which credit is allowed by the seller to the purchaser” pursuant to Section 6012(b)(3). If you have any further questions, please do not hesitate to write to us again. Cordially,

Victoria Lani Arena
Tax Counsel

VLM:es