Can equipment held for resale be shown to sales and service personnel or tested for compatibility without creating taxable use?

Plain-English summary

A technology manufacturer disputed tax on equipment taken from resale inventory. The Board's legal staff agreed that 16 listed items used to demonstrate equipment features to sales or service personnel should be removed from the audit.

The service-personnel activity was limited to showing the machines' features and did not involve tearing them down. On those facts, it qualified as demonstration and display. Testing whether the product itself was compatible with other equipment also qualified as permissible demonstration.

The memorandum distinguished three equipment loans. Two were taxable because they were not mere demonstrations. A third was also treated as taxable because the taxpayer lacked credible contemporaneous documentation supporting its later description of the loan.

What this means for you

Equipment manufacturers and resellers

Internal audiences do not automatically make a demonstration taxable. A focused presentation of the resale product's features to sales or service personnel qualified here.

Service-training teams

The result was expressly tied to demonstrations that did not involve tearing down the machine. More extensive hands-on servicing activity can have a different tax result.

Product-integration teams

Testing whether the resale product itself works with other equipment can be demonstration. Keep clear which item is being demonstrated and which equipment is serving as a testing tool.

Common questions

Q: Were demonstrations to service personnel allowed?
A: Yes, where the activity only showed features and did not involve machine teardown.

Q: Was compatibility testing treated as demonstration?
A: Yes, when the object was to determine whether the product itself was compatible with other equipment.

Q: Were all temporary equipment loans nontaxable?
A: No. Two loans were treated as taxable uses, and another lacked credible contemporaneous documentation.

Q: Does the memo create a general time-based safe harbor?
A: No. It rejected any general 30-, 60-, or 90-day tax-free use period for resale inventory.

Citations and references

• California Revenue and Taxation Code § 6094, including subsections (b) and (c)
• Kaiser, Burroughs, NCR, and Lockheed litigation — named without full citations in the official PDF
• February 1, 1990 oral advice, January 9 hearing, January 15/22/25 correspondence, and attachment listing 16 items — described but not reproduced in the official PDF
• Loan records G9, J5, and G3 and alleged O--- Committee transaction — described without contemporaneous documents in the official PDF

Shared-source note

The same official February 5, 1990 memorandum also supports Annotation 210.0170, which addresses the memo's separate rejection of a tax-free intervening-use period.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0085
• Original supporting opinion: 210.0085 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum

To:

Mr. C. Wayne Philpot
Appeals Unit – Room 450

From:

Gary J. Jugum
Assistant Chief Counsel

Subject:

H--- P--- Company
Account No. SY – XX-XXXXXX-020

210.0085
Date:

February 5, 1990

This is to confirm our oral advice to you of February 1, 1990 in regard to correspondence received concerning the referenced taxpayer’s pending petition for redetermination of tax. The hearing occurred on January 9, 1990. The correspondence in question is dated January 15, January 22 and January 25, 1990. Taxpayer has an admitted ulterior motive in this case. In conjunction with the California Manufacturer’s Association and Cal-Tax, taxpayer is trying to introduce a new exemption into the law. I say that because taxpayer is aware that the bulk of the items in dispute would be treated as nontaxable under our normal demonstration and display interpretations. Taxpayer is interested, however, in establishing a new principle for sales tax interpretation. Taxpayer wants the Board to conclude that an intervening use can be made of property purchased for resale without use tax applying, if the property will be sold as new in a reasonable period of time. Under Revenue and Taxation Code section 6094, any use of inventory, other than for demonstration and display, is taxable. There is no 30-day, 60-day, or 90-day permitted use. In fact, the statute itself does recognize two cases where use may be made of the property before resale with tax applying only on a fair rental value basis. Under section 6094(b) and (c), if there is an accommodation loan while the customer awaits delivery of property or the return of repaired property, the loaner is taxed at fair rental value. Likewise, if property is frequently used for demonstration and display and partly for other purposes, tax also applies on the fair rental value basis. Taxpayer would engraff a 30-day exception where property could be used tax free for any purpose, so long as it was resold. This approach is inconsistent with the holding of the Court in the Kaiser, Burroughs, NCR and Lockheed litigation. As I told you yesterday, the Business Taxes Department agrees that the first 16 items listed on the attachment to the January 15, 1990 letter should be deleted from the audit. This is what I said at the hearing. These cases involve demonstration to sales or service persons (although the list is wrongfully captioned). The demonstration to service personnel does not involve tearing the machine down, but only demonstrating the

Mr. C. Wayne Philpot

-2-

February 5, 1990
210.0085

features. Compatability testing, where the object is to test whether the product in question is compatible with other equipment, is likewise permissible demonstration and display within prior interpretations as taxpayer is well aware. We believe that loan numbers G9 and J5 are taxable as not involving mere demonstration and display. The Business Taxes Department also thinks that loan number G3 is taxable. There is no credible evidence to support the attorney and tax manager’s statements. The O--- Committee would not have accepted a casual undocumented loan of technical equipment. Absent contemporary written documentation of the event, we believe the transaction is taxable. In this case, taxpayer’s agent testified under oath that taxpayer sold used equipment as new equipment. The Board should not participate in this questionable activity by subsidizing it with public funds.

GJJ:sr

210.0085.doc