Was a delivered lathe still a taxable sale when the buyer failed to make the down payment, the contract was canceled, and the seller repossessed it?

Plain-English summary

A machinery seller delivered a new lathe under a contract requiring one-third of the price at delivery and the balance in equal installments. The buyer did not make the down payment, so the seller canceled the contract and repossessed the machine.

The Board concluded that delivery still created a sale under section 6006(e), because possession transferred while the seller retained title only as security for payment. Section 6012 included the total sale price in gross receipts, including amounts credited to the buyer.

The returned-property exclusion did not apply. The seller credited the customer's account but withheld more than $2,200 as damages in a breach-of-contract suit, so it had not refunded the full sales price in cash or credit. The transaction remained subject to sales tax.

What this means for you

Machinery and installment sellers

Repossession after default does not mean no sale occurred. Delivery under a security-title contract can create the taxable sale before payment is collected.

Credit managers

Document exactly how the customer's account is credited after repossession and whether any price amount is retained as damages or another charge.

Accountants and tax professionals

The full-refund condition mattered. A partial credit combined with a damages claim did not satisfy the returned-property exclusion described in section 6012.

Common questions

Q: How could there be a sale if the seller retained title?
A: Section 6006(e) included a transfer of possession where title was retained only as security for the price.

Q: Did the buyer's failure to make the down payment undo the sale?
A: No. The taxable sale occurred when the lathe was delivered under the contract.

Q: Why was the return exclusion unavailable?
A: The seller did not refund the full sales price; it pursued damages exceeding $2,200.

Q: What amount entered gross receipts?
A: The letter says the total contract sale price, including any amount credited by the seller to the purchaser.

Citations and references

• California Revenue and Taxation Code §§ 6006(e) and 6012
• California Attorney General Opinion 10875 (August 8, 1936)
• Requester's December 1, 1954 and January 24, 1955 letters — separate letters not reproduced in the official PDF
• Lathe installment contract, account credit, and breach-of-contract suit for $2,260.76 — described but not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0180
• Original supporting opinion: 200.0180 PDF

Original ruling text

200.0180

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 27, 1955

Your letters of December 1, 1954
and January 24, 1955
Account: REDACTED TEXT
REDACTED TEXT

Attention:

REDACTED TEXT

Gentlemen:
You request our advice as to whether sales tax is due on the following transaction. You entered into a contract with REDACTED TEXT whereby you agreed to deliver one new lathe on the basis of REDACTED TEXT paying one-third of the total cost of the machine on delivery and the balance in equal installments. The lathe was delivered February 23, 1954. The amount agreed to be paid at this time was not paid. You cancelled the contract and repossessed the machine. To clear your records you credited the customer's account on your books with the full amount of the contract price less the amount of damages shown in your suit for breach of contract in the amount of $2,260.76. The first problem is whether there was a sale as that term is used in the Sales and Use Tax Law. Section 6006(e) defines a sale as including "a transaction whereby the possession of property is transferred but the seller retains the title as security for the payment of the price." Under this section a sale of the lathe to REDACTED TEXT took place even though you may have reserved security title upon delivery of the property to REDACTED TEXT. See opinion of the Attorney General, 10875, August 8, 1936. Section 6012 of the Sales and Use Tax Law defines gross receipts which are the measure of tax as including the total amount of the sale price valued in money whether received in money or otherwise. The total amount of the sale price includes any amount for which credit was allowed by the seller to the purchaser. Thus, the total amount of the sale price of the lathe would be includible in gross receipts.

REDACTED TEXT

2

January 27, 1955
200.0180

It might be noted that Section 6012 excludes from gross receipts the sale price of property returned by customers when the full sales price is refunded either in cash or in credit. In your case, you did not refund the full amount of the sales price since you have filed suit for damages for breach of contract in an amount in excess of $2,200. Accordingly, we think that the transaction which you present is subject to sales tax. Yours very truly,

John H. Murray
Associate Tax Counsel
JHM:ja