Did transporting and displaying suits on hangers create tax before the hangers changed hands among manufacturers, suppliers, and retailers?

Plain-English summary

A clothing business used an accounting and billing system each time suit hangers moved among the manufacturer, supplier, retailer, and back to the supplier. California treated those transfers as sales and the hangers as containers under section 6364.

Direct factory purchases were nontaxable resale purchases. Transportation and display were incidental to container use and did not create tax. A suit supplier's intervening manufacturing use, however, could make particular hanger purchases taxable, so the subdistrict office was directed to adjust the audit.

The letter separately upheld correction of an erroneous bad-debt formula but treated the third-quarter return explanation as a timely first-quarter credit claim.

Common questions

Did displaying suits on hangers create taxable use?

No. The source treated display and transportation as incidental container uses.

Was every transfer automatically exempt?

No. Manufacturing use by a suit supplier could be an intervening taxable use.

Citations and references

• California Revenue and Taxation Code section 6364 — hanger container treatment applied; copy listed as an enclosure but not included in the official PDF
• Safeway Stores v. State Board of Equalization, 148 Cal. App. 2d 299 (1957) — completed intermediate use distinguished from incidental transportation and display in the source note
• Taxpayer's petition for redetermination and audit — hanger and bad-debt disputes described; separate records not reproduced in the official PDF
• Hanger accounting and billing records — title-passage conclusion based on the described manufacturer-to-supplier-to-retailer system; records not reproduced in the official PDF
• Proposed subdistrict and audit adjustments — manufacturing-use and bad-debt corrections directed but later computations not reproduced in the official PDF
• Third-quarter 1960 return and accompanying schedule — annual bad-debt explanation treated as a timely first-quarter 1960 credit claim; return and schedule not reproduced in the official PDF
• Board's established procedures — invoked to eliminate the first-quarter disallowed bad debts without identifying a separate procedural source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/195-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/195-0300.pdf

Original ruling text

195.0300

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

September 3, 1964

--- --- ----- --- ----- --- --“D”
This is to inform you of the position we have taken with respect to your petition for redetermination of sales tax. We are of the opinion the position of our auditors was correct as respects the disallowance of bad debts. However, we differ with them as respects the application of tax to suit hangers. We believe a sale occurs each time the hangers change possession. An accounting is made for the hangers and a suitable means of billing employed when they move from manufacturer to supplier to you and back to the supplier. We believe this treatment is consistent with a passage of title. Hangers constitute “containers” under Section 6364 of the Sales and Use Tax Law, copy enclosed. Your purchases of hangers direct from the factory are nontaxable sales for resale. Your use of the hangers for transportation and display purposes is incidental to their use as containers and does not make the hangers subject to tax. However, where you purchase hangers for resale to suit suppliers, you may be subject to tax because the suit suppliers make an intervening use of the hangers during the manufacturing process. The matter will be returned to our subdistrict office, and they will contact you about the proposed adjustments. As respects the disallowance of a bad-debt deduction because of the mistake in the formula method used by you, we believe the auditors acted properly. While we might debate the application of the legal rules of estoppel to state agencies, we do not believe estoppel is present in this case in any circumstance. Equitable estoppel in the law is essentially the proposition that where one person makes a misstatement and he intends that another person rely upon it, any loss or detriment incurred by the relying party should be borned by the person making the misstatement. Thus, there are three essential ingredients: 1. 2. 3.

A misstatement.
Intention that it should be relied upon.
Detriment suffered by the relying party.

The third requirement of estoppel is not present in this case. You have pointed out that you feel you are being penalized because you relied upon the formula presented by our auditor. We fail to see how you are being penalized by a tax being asserted at this time which you would have been

Mr. ---

-2-

Sept 3, 1964
195.0300

required to pay had our auditor been more thorough and set up the formula correctly. You are mistaken in saying you are being penalized. It is simply a matter of being assessed a deficiency which should have been reported during the audit period. It is not a matter of penalty at all, but rather a disallowance of what otherwise would be a windfall. We have reviewed your return for the third quarter 1960 and note that in making the schedule for this return you clearly stated the bad debts claimed on the face of the return were for the entire fiscal year and not merely for the third quarter. We believe this explanation accompanying your return may properly be regarded as a claim for credit for the first quarter 1960. Therefore, in accordance with our established procedures, we will eliminate the disallowed bad debts for the first quarter 1960 since we believe a timely claim was filed. Our auditors will make the necessary adjustments in the audit in keeping with the foregoing. We hope you will find this revision satisfactory. Very truly yours,

John H. Knowles
Associate Tax Counsel

JHK:o’b

[lb]

Note:
Use of items as containers generally includes
incidental uses of transportation and display, which
are not an intermediate and completed use found to
have existed by the court in Safeway Stores v. State
Bd. Of Equal. (1957) 148 CalApp2d 299.