Did a California laser manufacturer owe use tax when it delivered inventory loaners to out-of-state customers awaiting ordered equipment?

Plain-English summary

A California gas-laser manufacturer sometimes fell behind schedule and loaned instruments from stock to out-of-state customers awaiting their ordered lasers. The loaner was often a different model, and its availability sometimes helped secure the order.

The manufacturer shipped each loaner by common carrier for use outside California. When the ordered laser became ready one to six months later, the customer returned the loaner to California, where it was checked, calibrated, and returned to stock for sale as new or possible re-loan.

The Board concluded that these loans did not create taxable California use. It analogized the arrangement to property properly acquired under a resale certificate and leased to an out-of-state lessee under a term beginning upon delivery outside California.

What this means for you

Manufacturers with delayed orders

Keep records showing where the loaner was delivered and used, how it returned, and that it went back into resale inventory.

Equipment sellers

The customer had already ordered other equipment, but the result turned on out-of-state delivery and use rather than treating the loan as a California demonstration.

Accountants and tax professionals

Track common-carrier documents and the full custody chain. The memorandum treated the out-of-state customer as a bailee using the equipment outside California.

Common questions

Q: Were the loaners delivered in California?
A: No. The manufacturer shipped them by common carrier to out-of-state customers.

Q: Did the loaners stay outside California?
A: No. Each was returned to the California plant after the ordered laser shipped.

Q: What happened after return?
A: The manufacturer checked and calibrated the laser and put it back into stock for sale as new, although it might be loaned again.

Q: Why did the Board find no use tax?
A: It analogized the arrangement to an out-of-state lease commencing upon delivery outside California and applied the same treatment to an out-of-state bailment.

Citations and references

• San Jose Auditing's December 7 memorandum — year and separate memorandum not supplied in the official PDF
• Prior Board holdings on resale-certificate property leased to out-of-state lessees — described without dates, identifiers, or copies
• Common-carrier shipment, order, return, inspection, and calibration records — transaction flow described; records not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0420
• Original supporting opinion: 210.0420 PDF

Original ruling text

State of California

Board of Equalization

Memorandum
210.0420

To:

San Jose – Auditing (SE:JPO)

From:

Tax Counsel (PRD)

Date:

February 2, 1965

This is in reply to your memo of December 7 in which you inquire about the taxability of the loan of gas lasers to out-of-state customers. The taxpayer is a manufacturer of lasers. As we understand the situation, the taxpayer is behind in his production schedule so that the taxpayer sometimes takes instruments out of stock and loans them to customers who have lasers on order. In most cases these lasers on order are different models from the loaner. Quite often the availability of the loaner instrument (laser) is influential in receiving the order. The model the customer orders is shipped to the customer anywhere from one to six months after receiving the original order. The out-of-state customer then returns the loaner to the California plant. The returned instrument is then checked, calibrated, and returned to stock to be sold as a new instrument; however, it may be loaned again. The lasers are shipped out of state by common carrier but are, in all cases, returned to California. In our opinion, these loans do not constitute a taxable use. The situation is somewhat analogous to the leasing of equipment to an out-of-state lessee. We have held in such cases that where the lessor has properly acquired the property under a resale certificate and subsequently leased the property to an out-of-state lessee, with the term of the lease commencing upon delivery at a point outside the state, he will not be liable for use tax for that out-of-state use. The same rule should apply where equipment is delivered to a bailee at an out-of-state point for use outside this state.

PRD:spg

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