Could a later contract amendment retroactively move title passage outside California?

Plain-English summary

The out-of-state contractor agreed to supply and install a continuous cooking system in California under a lump-sum destination contract. Tax Counsel tentatively treated the manufactured digester shell as a fixture sold in California, measured by the prevailing ready-for-installation price of similar fixtures.

The original destination terms and installation obligation meant title did not pass before jobsite delivery. Because the digester was delivered before the parties' May 11 amendment, their later attempt to make title pass at shipment could not divest California of a tax right that had already vested.

The amendment could affect other equipment not yet delivered. For that later property, title could pass before transportation to the California jobsite, allowing separately stated post-title transportation charges to be excluded.

The contractor's apparent use of the buyer's seller's-permit number without agency authority was improper, but it did not make the buyer the proper taxpayer. The memorandum treated the contractor as consumer of construction materials before the amendment and retailer of later tangible personal property sold after it.

Common questions

Could the amendment retroactively change title to the delivered digester?

No.

Could it affect equipment still awaiting delivery?

Yes, because tax rights had not yet vested on those deliveries under the memorandum's assumptions.

Were post-title transportation charges taxable?

Separately stated charges for transportation after title passage could be excluded for the later equipment.

Did using the buyer's permit number make the buyer the taxpayer?

No, although the memorandum regarded the use as improper absent an authorized agency relationship.

Citations and references

• California Revenue and Taxation Code section 6012(c) — pre-sale transportation treatment discussed in the memorandum
• Former California Sales and Use Tax Ruling 11(c) — manufactured-fixture and construction-contractor rules applied to the digester shell and other property
• January 17, 1967 Headquarters Principal Tax Auditor memorandum — requested advice on materials and equipment used in the California cooking-system project; request answered but not reproduced in the official PDF
• $1.5 million lump-sum contract to supply and install the continuous cooking system — destination terms, foundations, installation duties, and delivery schedule reviewed and applied; full contract not reproduced in the official PDF
• February 5, 1964 initial proposal, including engineering services listed on page 9 — price content considered; proposal not reproduced in the official PDF
• January 31, 1964 order and May 11, 1964 contract modification providing for title passage at shipment — timing and effect analyzed; order and modification not reproduced in the official PDF
• August 7, 1964 buyer letter — appeared to authorize use of its seller's-permit number for ex-tax California purchases; agency and permit use analyzed, but the letter is not reproduced in the official PDF
• Attached account materials — concerned the parties, equipment, delivery, and permit use; contents and attachment 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/190-2435.pdf

Original ruling text

State of California

Board of Equalization

Memorandum
To:

Headquarters – Principal Tax Auditor

From:

Tax Counsel (EHS:EDM) - Headquarters

Subject:

G--- Corporation
---, CA XXXXX
K---, Incorporated
------, New York

190.2435
Date:

March 29, 1967

S- -- XX XXXXXX
nonpermittee

This is in reply to your memorandum of January 17, 1967, in which you ask for our opinion in respect to the application of the tax in connection with the sale of materials and equipment, etc., used in connection with the construction of a “K--- C--- C--- System” in [city], California, for the G--- Corporation (herein, “B” corporation) by K---, Inc., (herein, “A” corporation). After reviewing the attached materials relating to this account, it appears that “A” corporation, a New York corporation which does not hold a California seller’s permit, entered into a contract with “B” corporation, a California permittee, under which “A” corporation agreed “to supply and install” the above mentioned “cooking system” (i.e., digester shell unit, etc.) for “B” corporation at the lump-sum price of $1,500,000. The contract provides, among other things, that “A” corporation will furnish the cost of labor and materials in fabricating the “Continuous Cooking System” and in installing it, except that “B” corporation was to provide the foundations including the reinforcing steel and anchor bolts necessary for installing the “digester unit.” The major element of this installation is the digester, which is a unit 11 feet in outside diameter and 160 feet high. We understand that in erecting the “digester shell unit,” it is attached to a foundation by means of large anchor bolts. Inasmuch as the equipment specifications for “A” corporation’s “digester shell unit” includes shop fabrication, we assume that the particular unit was designed, fabricated, and tested at the fabricator’s out-of-state factory prior to its shipment to “B” corporations’ California jobsite for final field erection. All items of property are shipped f.o.b. [city], California. In addition to the supply and erection of the digester unit and the supply of the basic mechanical components, the selling price contains certain engineering services as listed on page 9 of “A” corporation’s initial proposal of February 5, 1964. The cost of the materials and equipment used in manufacturing the digester unit have not yet been ascertained. We assume that, due to its size, it was probably dismantled to

Headquarters – Principal Tax Auditor
(S- -- XX XXXXXX and K---, Inc.)

-2-

March 29, 1967
190.2435

facilitate shipment to the California jobsite. There it was installed by “A” corporation, under the supervision of “A” corporation’s contractors, on a foundation supplied by “B” corporation. Installation was to commence between March 1, 1964, and April 15, 1964, and be completed in four months. On these facts, it is out tentative opinion that, as to “A” corporation, the “digester shell unit” is tangible personal property and the transaction constituted a sale of tangible personal property in California by “A” corporation to “B” corporation within the meaning of sales and use taxes ruling 11(c). Since the contractor was the manufacturer of the fixture (i.e., digester unit) it furnished and installed under its lump-sum construction contract, the tax applies to the retail selling price which, in this case, would be the prevailing price at which similar fixtures ready for installation would be sold to contractors. It should be noted, however, that “A” corporation is not a retailer of those items of tangible personal property it installs but does not furnish under the construction contract. It has been our view that, when a seller in under a duty to install specific property after delivering it to the buyer’s jobsite under a contract which terms are “f.o.b. point of destination,” the title to the property will not be regarded as passing prior to delivery. Since “A” corporation is required, under the contract, to install certain equipment and materials upon delivery to the jobsite, and the agreement provides that the property is to be shipped f.o.b. [city], California (point of destination), it would appear that title to the property does not pass prior to delivery to the buyer’s jobsite. It should be mentioned in this connection that any charge for transportation of the goods is one which occurs prior to the sale and, thus, is subject to sales tax under
§ 6012(c) of the California Sales and Use Tax Law.
Also, since the contract provides that the “digester shell unit” erection will commence between March 1, 1964, and April 15, 1964, it is clear that it will be delivered to the buyer’s jobsite, at the latest, by April 15, 1964. On these facts, title to the digester unit would pass prior to the attempt on May 11, 1964, to modify the original contract terms. Even though parties may change their rights as between themselves, a self-serving change in terms of an existing contract does not affect the rights of a third party (i.e., State of California) which vest on the making of the agreement of sale. Accordingly, it is our opinion that the state’s right to the tax on the “sale” of the digester unit could not be divested by a subsequent modification of the contract terms. The May 11, 1964, modification by the parties provided that title pass at the point of shipment. We assume the modification became effective between the parties sometime in May of 1964. Since the modification occurred prior to the time -all ---other equipment under the contract was to be delivered (six to eight months from the date of order – January 31, 1964), it appears that title to this equipment had not yet passed at the time the parties sought to modify their agreement. Therefore, it is our belief that as to this equipment, the modifications affected not only the rights and duties between the parties but also any “rights” of a third party (State of California).

Headquarters – Principal Tax Auditor
(S- -- XX XXXXXX and K---, Inc.)

-3-

March 29, 1967
190.2435

Inasmuch as title to this equipment passes to the buyer prior to the transportation of the property to the jobsite, any separately stated charges for such transportation would be excluded from the tax. In giving our opinion, we have assumed that “A” corporation purchased this equipment from California vendors ex tax and furnished their vendors with “B” corporation’s seller’s permit number. The letter from “B” corporation to “A” corporation, dated August 7, 1964, would seemingly infer “B’s authorization to use its seller’s permit number in purchasing property from California vendors ex tax for resale. Inasmuch as “A” corporation does not appear to be “B” corporation’s duly authorized agent in purchasing this property, we believe that there was an improper use of “B” corporation’s seller’s permit. It is our opinion, however, that “A” corporation’s use of “B” corporation’s seller’s permit number does not require the conclusion that “B” corporation, rather than “A” corporation, is the proper taxpayer. Prior to the parties’ modification of the original contract, it appears that “A” corporation would be the consumer of any materials it uses in fulfilling its construction contract and, as such, must pay tax measured by the cost of the materials to it. However, after the modification, “A” would be the retailer for any tangible personal property (i.e., equipment, etc.) sold to “B” corporation in California. In addition, since we have tentatively concluded that “A” corporation is the retailer of the “fixture” it furnishes and installs for “B” corporation under a lump-sum construction contract, it would appear that “A” corporation must pay sales tax on the “sale” of the fixture to “B” corporation.

EDM:ab