Does a borrower owe California sales tax when its secured creditor repossesses the borrower's equipment and independently sells it to a third party?

Plain-English summary

The Board's tax counsel concluded that petitioner "J" was not liable for sales tax when secured creditor "N" repossessed mortgaged machinery and independently sold it to buyer "U."

The key fact was control of the sale. J did not find the buyer, had no voice in the transaction, and did not appoint N as its agent. That meant there was no direct or indirect sale from J to U. Counsel added that even if the events were forced into a sale framework, the first transfer would be from J to N for resale, followed by N's actual sale to U—still leaving J without retail-sales-tax liability.

Counsel therefore recommended granting J's petition and cancelling the determination against it.

What this means for you

Borrowers whose collateral is repossessed

A creditor's independent repossession and resale is not automatically treated as your retail sale. Agency and control matter: this letter relied on the borrower having no role in locating the buyer or conducting the sale.

Secured lenders and equipment finance companies

A lender that repossesses and sells collateral may itself be the seller. This letter addressed only the assessed borrower's liability; it did not decide the creditor's separate permit or tax obligations.

Accountants and tax professionals

Do not treat every foreclosure or repossession alike. Review who controlled the resale, whether the creditor acted as the debtor's agent, and whether any transfer to the creditor was for resale.

Common questions

Q: Did the Board treat the borrower as selling directly to the final buyer?
A: No. Counsel found no direct or indirect sale by J to U because secured creditor N was not J's agent and J did not control the sale.

Q: What if the repossession is characterized as a transfer from the borrower to the creditor?
A: Counsel said that even under that rejected theory, the transfer would have been to N for resale, followed by N's sale to U, so J still would not owe retail sales tax.

Q: Did the letter decide whether the creditor owed tax?
A: No. It addressed the determination against J and recommended cancelling it.

Q: Can another taxpayer rely on this result?
A: Not as binding authority. It is a historical counsel recommendation tied to the stated facts, and current statutes, regulations, or later guidance may control.

Citations and references

The short letter cites no numbered statute or regulation. Its analysis turns on who made the retail sale and whether the secured creditor acted as the borrower's agent.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0060
• Original supporting opinion: 200.0060 PDF

Original ruling text

STATE OF CALIFORNIA

200.0060

STATE BOARD OF EQUALIZATION
February 4, 1970
REDACTED TEXT

Dear Mr. REDACTED TEXT:
This is with reference to the petition of "J" and the hearing held on the matter last January 15 in San Francisco. "J" has been held liable for sales tax on the retail sale of machinery, fixtures, equipment, etc., which was the subject of a repossession and sale by "N". The property was mortgaged by "J" under a chattel mortgage security agreement executed with "N". "J" had no voice in the sale and did not locate the buyer, "U". It is our opinion that there was no sale by "J" to "U" directly or indirectly, as "N" was not an agent of "J". If a sale theory has any merit at all, which we reject, it has to be based on a sale by "J" to "N" for resale. There is no doubt about the fact that "N" did sell the property to "U". Thus, even under a sale theory, "J" would not be liable for sales tax, since the property was resold by "N". Accordingly, we are recommending that the petition of "J" be granted and the determination against "J" be cancelled. Very truly yours,

Robert H. Anderson
Tax Counsel
RHA/vs [lb]