Did California impose use tax on cargo containers brought empty from New Jersey and first placed into commercial service in California?

Plain-English summary

California recommended allowing the fuel-oil refund for one vessel because the claimant supplied a bill of lading showing the oil was shipped out of state. It recommended denying the similar claim for another vessel because no comparable document was supplied. Counsel also recommended allowing an additional local-use-tax refund claim for insignia that had not been presented to the auditor.

The cargo-container refund was denied. The containers were purchased through related companies, brought empty from New Jersey, and first installed into commercial service in California. Counsel treated that installation as the first consumptive use and a taxable intrastate event. The lease arrangement was viewed as financing, not an earlier consumptive use.

The taxpayer could still request a Board hearing within 30 days.

Common questions

Did later interstate or foreign use prevent California tax?

No. Counsel concluded that the first consumptive use occurred when the containers entered commercial service in California.

Why were the two fuel-oil claims treated differently?

One had a supporting bill of lading; the other did not.

Citations and references

• H. J. Heinz Co. v. State Board of Equalization, 209 Cal. App. 2d 1, 25 Cal. Rptr. 685 — first consumptive use cited
• American Airlines v. State Board of Equalization, 216 A.C.A. 215, 30 Cal. Rptr. 590 — first-use analysis cited
• Southern Pacific Co. v. Gallagher, 306 U.S. 167 — intrastate use and interstate-commerce analysis cited
• Taxpayer's refund claims and original audit record — fuel-oil, insignia, and cargo-container issues and recommendations stated; claim details, copies, and audit workpapers not supplied in the official PDF
• Bill of lading issued by the redacted "Y" corporation — out-of-state shipment of fuel oil aboard vessel "X" described; copy not included in the official PDF
• Cargo-container purchase and lease arrangement — related-company terms and prior tax characterization summarized; contracts and prior determination not reproduced in the official PDF
• Taxpayer's Board-hearing request — acknowledged, but the separate request and any later Board action are not supplied in the official PDF
• Three waiver-of-Board-hearing forms — listed as enclosed but not included 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/195-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/195-1440.pdf

Original ruling text

195.1440

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 25, 1965
Gentlemen:
This is to advise you of our recommendation to the Board with respect to your claims for refund. We will recommend the allowance of a claim for the fuel oil aboard the “X” shipped out of state under a bill of lading issued by the “Y” corporation. We will also recommend an allowance of an additional claim for the local use tax on purchases of insignia. We agree, however, with the auditor in offsetting the fuel oil aboard the “Z” and the purchases of cargo containers. “Y” supplied us with the bill of lading on the “X” fuel oil. We have not been supplied with a similar document with regard to the “Z” and therefore find no basis for allowing a refund on that shipment. The insignia item was not included in the original claim for refund because it was not made known to our auditor. He had no objection to it and we are recommending that it be allowed. The cargo containers were purchased from “A” through “B”, a corporate subsidiary of “C”. The lease from “B” to you was previously considered a lease in lieu of a sale and taxable as a sale for purposes of the Sales and Use Tax Law. We believe this interpretation is correct and that use tax is due upon your use of these items in California. The installation of these goods into commercial service is the first consumptive use made of them because they were brought empty into this state from New Jersey. The first consumptive use in California constitutes a taxable event. (H. J. Heinz Co. v. State Board of Equalization, 209 Cal. App. 2d 1 [25 Cal. Rptr. 685]; American Airlines v. State Board of Equalization, 216 A.C.A. 215 [30 Cal. Rptr. 590].) Moreover, the installation of these goods into commerce is itself an intrastate use not entitled to constitutional protection under the interstate commerce clause. (Southern Pacific Co. v. Gallagher, 306 U.S. 167.) We do not believe the fact that the goods were made the subject of a lease constitutes a prior use; at least it is not a consumptive use under the Heinz and American Airlines decisions. It was, at most, a means of financing the property. You have requested a Board hearing on your claim for refund. If you disagree with our conclusions and still desire such a hearing, it will be given on request. Please let us know within the next 30 days so that we may make the necessary arrangements. If a Board hearing is no longer desired, please sign and return two of the enclosed waiver of Board hearing forms. The third copy is for you files. Very truly yours,

John H. Knowles
Associate Tax Counsel
JHK:ls

[lb]