Was river sand taxable when a lessee held removal rights and either sold excavated sand or assigned the removal right to a contractor?

Plain-English summary

A lessee received permission to sell river sand for at least 15 cents per cubic yard. Tax counsel agreed that the lessor's grant of the right to remove sand did not itself create a taxable sale between the lessor and lessee.

The next transaction depended on what the lessee actually transferred. If the lessee removed the sand and then sold it, the lessee made a taxable sale of tangible personal property.

If the lessee merely assigned its removal right to a contractor that supplied the excavating and transportation equipment and severed the sand itself, tax did not apply to that assignment. Counsel suggested obtaining the lessor's consent so the contractor's right to enter the land and stand in the lessee's shoes would be clear.

Common questions

Was the lessor's grant of sand-removal rights taxable?

No. The memorandum found no sales tax between the lessor and lessee.

What if the lessee removed and sold the sand?

That was a taxable sale of tangible personal property.

What if the contractor received only the right to enter and excavate?

A true assignment of that removal right was not taxable under the memorandum's analysis.

Citations and references

• No statute, regulation, or case was cited in the supporting memorandum.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/150-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/150-0528.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Diego Auditing (JHMcC)

From:

Headquarters – Tax Counsel (EHS)

Subject:

H. N. P--P. O. Box XXX
---

150.0528
Sacramento
January 24, 1962

Account None

This refers to your memo of January 17. In the third paragraph you state that Mr. P--- as lessee was granted permission to sell river sand for a price of not less than 15¢ per cubic yard. In your fourth paragraph you state that you do not believe any sales tax is involved as it appears that Mr. P--- has merely been granted the right to remove sand. We agree that no sales tax is involved as between the lessor and Mr. P--- as lessee. However, we believe that if Mr. P--- removes sand and sells it that he, Mr. P---, is making a sale of tangible personal property and is subject to the tax. You inquire whether or not there will be any tax on account of an option granted by Mr. P--- to a contractor pursuant to which the contractor will provide excavating and transporting equipment and dig the sand from the river bottom. As we have said, if Mr. P--- sells sand, he will be subject to the tax. On the other hand, if he merely assigns his right to remove sand, then the removal of the sand by the assignee would be in the same status as removal of the sand by P--- himself, and the tax would not apply. We think, however, that the lessor should probably be asked to consent to the assignment in order to remove any doubt as to the right of the contractor to enter upon the land and remove the sand and gravel. This, perhaps, is not a question of the application of sales tax but it would make it clearer that the contractor stands in the shoes of Mr. P--- in exercising his right to excavate gravel or sand.

EHS:fb