Can resale inventory be used tax-free for 30, 60, or 90 days if it is later sold as new within a reasonable period?

Plain-English summary

A technology manufacturer argued for a new rule allowing property purchased for resale to be used for 30, 60, or 90 days without use tax if it was later sold as new within a reasonable time. The Board's legal staff rejected that approach.

The memorandum said section 6094 taxes any inventory use beyond demonstration and display and creates no general time-based grace period. It pointed to the statute's express fair-rental-value provisions for qualifying accommodation loans and for property frequently demonstrated but partly used for other purposes; those specific rules did not support a broad tax-free window.

At the same time, the memorandum recognized genuine demonstrations. It agreed that 16 listed items used to demonstrate features to sales or service personnel should be removed from the audit, where service-personnel demonstrations did not involve tearing down the machine. Compatibility testing of the product itself was also permissible demonstration. Two equipment loans were taxable, and a third was treated as taxable because credible contemporaneous documentation was missing.

What this means for you

Manufacturers and equipment resellers

Later selling an item as new does not erase an intervening taxable use. Classify the use when it occurs rather than relying on how quickly the item is resold.

Sales and service teams

Showing a machine's features can qualify as demonstration even when service personnel attend. More extensive operational activity, such as teardown training, may fall outside that treatment under related opinions.

Accountants and inventory managers

Keep contemporaneous records for equipment loans and demonstrations. Unsupported after-the-fact descriptions were not accepted for one disputed loan.

Common questions

Q: Is there a 30-, 60-, or 90-day safe harbor for using resale inventory?
A: No. The memorandum says section 6094 contains no general permitted-use period.

Q: Does resale as “new” prevent tax on an earlier use?
A: No. A use beyond demonstration or display can be taxable even when the item is later sold as new.

Q: Was compatibility testing allowed?
A: Yes, where the object was to determine whether the product itself was compatible with other equipment.

Q: When can fair rental value apply instead of another tax measure?
A: The memorandum identifies qualifying accommodation loans under section 6094(b) and property frequently demonstrated but partly used for other purposes under section 6094(c).

Citations and references

• California Revenue and Taxation Code § 6094, including subsections (b) and (c)
• Kaiser, Burroughs, NCR, and Lockheed litigation (the memorandum gives no full citations)
• 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 210.0085, which focuses on feature demonstrations to sales and service personnel and compatibility testing.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0170
• Original supporting opinion: 210.0170 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

210.0170
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
210.0170

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