Was an out-of-state seller's sale of telephone-line components a taxable retail sale?

Plain-English summary

Section 6016.5 treated a completed telephone line and its supporting poles, towers, or conduit as not tangible personal property. It did not give that status to the separate components before construction.

The cables and related items were materials, not fixture accessories. When the out-of-state seller sold them to the contractor building the line, the contractor did not resell them in the form of tangible personal property. The sale was therefore at retail under section 6007.

If sales tax did not apply because of where title passed or the interstate transaction, the contractor's storage and use of the components in California was subject to use tax. Using them in construction changed them from tangible personal property into part of the completed line.

The contractor had not issued, and should not have issued, the Regulation 1668 resale certificate. Holding a seller's permit would not change the analysis. Tax Counsel recommended denial of the claim.

Common questions

Were telephone-line components already part of the statutory telephone line when sold?

No. Only the constructed line received section 6016.5 treatment.

Were the cables fixtures?

No. The letter classified the cables and related items as materials.

Was the contractor reselling tangible personal property?

No. Construction converted the components into a completed telephone line that section 6016.5 treated as not tangible personal property.

What if California sales tax could not apply to the interstate sale?

The letter concluded that the contractor's California storage and use of the components remained subject to use tax.

Citations and references

• California Revenue and Taxation Code sections 6016.5 and 6007 — completed telephone-line treatment and retail-sale definition applied; section 6007 quoted
• California Code of Regulations, title 18, section 1521(b) and (g) — materials consumed by a construction contractor and listed contractor categories applied
• King v. State Board of Equalization (1972) 22 Cal.App.3d 1006, 1014 — powerline categorized as a structure on land, extended to the stated telephone line
• California Revenue and Taxation Code section 6352 and U.S. Constitution amendment XIV and article I, section 8 — alternative interstate-sales-tax limits discussed without investigation of title passage or interstate-commerce facts
• California Revenue and Taxation Code sections 6009 and 6201 — taxable California storage and use of the components applied
• California Code of Regulations, title 18, section 1668 and California Revenue and Taxation Code section 6067 — resale certificate and seller's permit distinguished
• Request for reconsideration, related correspondence, and the addressee's January 16 letter — materials reviewed, including the letter's quotation of section 6007; not reproduced in the official PDF
• Contractor's construction contract with the telephone company — described as the agreement under which the line was built; not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/190-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/190-1047.pdf

Original ruling text

STATE OF CALIFORNIA

190.1047

STATE BOARD OF EQUALIZATION

April 4, 1975

Mr. T--- -. O--Attorney at Law
Suite XXXX
XXX South --- Street
--- ---, CA XXXXX
Dear Mr. O---:
RE:

A--- - P--- of California
SC – XX-XXXXXX
Your file No. 104.1-1

Upon your request for a reconsideration of your client’s claim, the matter was referred to me for that review. From the correspondence it seems to me there are two prime points of actual disagreement. The first is our conclusion that when Section 6016.5 states that the telephone line and the poles, towers, or conduit by which it is supported or contained are not tangible personal property, the section does not decree that the line components are not tangible personal property before they are made into the completed line. Only the constructed telephone line is not tangible personal property. In other words, the components do not constitute a telephone line at the time of their sale to the construction contractor. The second is our conclusion that the cables and related items are materials rather than fixtures for the purposes of Regulation 1521. They are not accessories to the telephone line. Even King states that a powerline (and presumably a telephone line) is to be categorized as a “structure on land” (22 Cal. App. 3d 1006, 1014). The other differences may be more apparent than substantive.

Mr. T--- -. O--(SC – XX XXXXXX)

-2-

April 4, 1975
190.1047

The accepted facts seem to be that (assuming for description our view of the two prime points above) your client sold tangible personal property to M--- Contracting Co., which used the property so purchased as constituents of a telephone line it was constructing pursuant to a contract M--- had with the V--- Telephone Company. The question is whether the sale of the tangible personal property by A--- - P--- to M--- was or was not a sale at retail (for the purposed of the sales tax) or was used or consumed by M--- (for the purposes of the use tax). For the purposes of the dollar responsibility of your client, we do not tend to distinguish carefully between the sales tax imposed on your client and the use tax imposed upon M--- which your client has the responsibility of collecting and paying. I assume without investigation that the use tax is the applicable tax because your client is located out of state. Therefore, in all probability, the sale of goods shipped to M--- in California is not subject to sales tax because of Section 6352 and the prohibitions imposed by the due process and interstate commerce provisions of Amend. XIV and Art. I, §8 of the U.S. Constitution. In other words, either title passed outside this state or the sale was a sale “in” interstate commerce. But we see no inhibition to the application of the sales tax in the issues raised by this petition. The basis for our belief that the sale was at retail is a consequence of the interaction of Sections 6007 and 6016.5. Section 6007 provides: “A ‘retail sale’ or ‘sale at retail’ means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property.” If the section read as quoted in your letter of January 16, “other than resale in the regular course of business in the form of tangible personal property”, you would have presented a different argument. But that section requires that the resale be in the form of tangible personal property and the construction of the telephone line by M--- prevents them from transferring or selling it as tangible personal property. Since the sale to M--- was at retail, the gross receipts must be included in the measure of sales tax unless an independent reason prevents that tax from applying. Please understand that we do not argue that V--- did not become the owner of the completed telephone line. If the sales tax is not applicable for any reason, it appears to us that M--- necessarily stored and used the components and is subject to use tax. As well as the actual dominion exercised by the contractor in devoting the purchased tangible personal property to the construction contract, M--also, by those acts (and the effect of Section 6016.5), changed the nature of the items from tangible personal property. That to us is a Section 6009 use taxable under Section 6201, since use, as defined, is not confined to consumptive actions. Although Section 6009 excludes the sale of that property in the regular course of business, that property referred to must be tangible personal property. While that portion of that section is not as literally specific as the first sentence of Section 6007, we believe the conclusion inescapable because the Sales and Use Tax Law is intended to be complementary and must be so interpreted.

Mr. T--- -. O--(SC – XX XXXXXX)

-3-

April 4, 1975
190.1047

Although we believe the point is not relevant, we note that under these circumstances V--cannot be a taxable consumer for the purposes of the Sales and Use Tax Law because it did not purchase tangible personal property from a retailer upon which it can be taxed. One point of clarification. The resale certificate referred to in earlier correspondence is the certificate prescribed by Regulation 1668. M--- did not issue such a certificate to your client, nor should it have. Perhaps M--- does hold a seller’s permit (Section 6067). California businessmen often refer to their seller’s permit as a “resale card”. For our purposes, it does not matter whether or not M--- had a seller’s permit. You are correct that Regulation 1521(g) only states that certain persons are construction contractors. But in denying that the materials your client sold to M--- became fixtures, we must rule that M--- was the consumer of them as a construction contractor. So the application of tax to the consumption of materials is expressed in (b) rather then (g). I must submit a recommendation that the claim be denied. If you have any questions about the administrative process in handling the claim, please do not hesitate to contact me directly at the above address. Very truly yours,

Philip R. Dougherty
Tax Counsel