Does a California dealer make a taxable sale when an installment buyer assigns a conditional-sales contract to a replacement buyer?

Plain-English summary

When a buyer under a conditional-sales contract wants another person to take over the property and remaining payments, the dealer's California sales-tax result depends on who arranged the substitution and when possession passed.

The memorandum describes three paths:

• If the dealer repossesses the property and then transfers it again, the later transaction is a taxable sale by the dealer.
• Even without formal repossession, the dealer makes a taxable sale if it finds the replacement buyer, signs a new conditional-sales contract, and directs the original buyer to transfer the property. The memorandum applies Revenue and Taxation Code section 6006(e) because possession is transferred while the dealer retains title as security.
• If the original buyer independently finds the assignee and transfers the contract interest and possession before the dealer enters a replacement contract, the original buyer—not the dealer—made the transfer of possession. The dealer's later contract is not another taxable sale by the dealer.

What this means for you

Dealers managing contract takeovers

Document who located the replacement buyer and the exact order of the assignment, possession transfer, and replacement contract. Those facts determine whether the dealer made another retail sale.

Original installment buyers

An independent assignment can make the original buyer the seller in the first transfer. The memorandum does not decide that buyer's separate tax obligations.

Accountants and tax professionals

Do not rely only on the paperwork label. Trace repossession, buyer procurement, possession, and title-retention facts under section 6006(e).

Common questions

Q: Is every contract takeover taxable to the dealer?
A: No. A dealer-arranged substitution or post-repossession transfer is taxable to the dealer, but an independent assignment completed by the original buyer before the new dealer contract is not.

Q: What if the dealer never physically repossesses the property?
A: The dealer can still make a taxable sale if it finds the replacement buyer and directs the original purchaser to transfer possession.

Q: Why is the independent-assignment sequence different?
A: Because possession passes from the original buyer to the assignee before the dealer's later contract; the dealer does not transfer possession in that later transaction.

Q: Does the memorandum decide the original buyer's liability?
A: No. It decides whether the later transaction is taxable to the retailer.

Citations and references

• Cal. Rev. & Tax. Code § 6006(e) (the provision cited for a transfer of possession where the seller retains title as security)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0040
• Original supporting opinion: 200.0040 PDF

Original ruling text

State of California

Board of Equalization

200.0040

Memorandum
To:

San Diego – Auditing

From:

Headquarters – Sales Tax Counsel (WWM:SGL)

Subject:

REDACTED TEXT

Date:

November 18, 1957

Retailers entered into a conditional sales contract with buyer for the sale of tangible personal property. Subsequently, buyer wishes to assign his interest to another person who is willing to continue making payments on the balance due. If seller enters into a conditional sales contract with buyer’s assignee in regard to the same chattel and showing the balance due as the purchase price, is this transaction a sale taxable to retailer? If there is any repossession by the retailer from the original vendee, the subsequent transaction is a sale. Furthermore, even though the dealer does not repossess, if the transaction is one where the dealer obtains the person who is to take possession of the tangible personal property by taking over the original buyer’s interest in the contract and directs the original purchaser to assign his interest to this new customer, there is a sale, since it is a transaction whereby the possession of the property is transferred, but the seller retains the title as security for the payment of the price (Section 6006(e)). However, where the conditional vendee of the tangible personal property independently assigns his interest to another person, and, subsequently, the assignee independently enters into a conditional sales contract with regard to that same property with seller, this latter transaction would not be a taxable sale, since the possession of tangible personal property passed to the conditional vendee’s assignee in the former transaction, wherein the conditional vendee was the seller. Hence, there would be no transfer of possession of tangible personal property by the retailer in the latter transaction. Therefore, in the instant situation, if the original purchaser obtains the new buyer and assigns his interest to him prior to the making of a new conditional sales contract between the dealer and new buyer, then the latter transaction would not be taxable to the dealer. However, if it is the dealer who obtains the new buyer, enters into a conditional sales contract with him, and then directs the original purchaser to transfer the tangible personal property to the new buyer, then the transaction is taxable to the dealer. SGL:tl

Warren W. Mangels