Was use tax due when an affiliated Mexican company drove promotional pens into California and delivered them to the USPS for mailing as gifts?

Plain-English summary

A California pen manufacturer arranged for an affiliated Mexican company to finish promotional pens and forward them as free samples. The affiliate either used a common carrier or drove its own trucks from Mexico to a California USPS facility for mailing to recipients.

The reconsideration request challenged the earlier conclusion about the affiliate's own-truck method. Senior tax counsel reaffirmed that use tax applied.

The affiliate's driver acted for the donor, and the donor retained effective control until the driver delivered the pens to USPS in California. At that point title passed, the gifts became complete, and taxable use occurred in California.

The foreign-commerce argument did not change the result. The letter concluded that importation ceased when the driver reached the California destination and that the gift occurred before the pens later left California, if they did.

The source distinguished the prior common-carrier method, which the earlier memorandum had treated as completing the gift outside California. This letter did not reverse that separate conclusion.

What this means for you

Businesses sending promotional samples

Track who controls the property during transport and the exact point where the carrier or postal service receives it for the donee.

Cross-border logistics teams

Using an affiliated company's own truck can produce a different control and delivery analysis from handing property to an independent common carrier outside California.

Accountants and tax professionals

Separate sales-tax export rules from use-tax treatment of gifts imported into California. The source rejected applying the export provision to these facts.

Common questions

Q: Where did the letter say the gift became complete?

A: At the California USPS facility when the affiliate's driver delivered the pens.

Q: Why had the donor not lost control in Mexico?

A: The driver worked for an affiliated company acting for the donor, and USPS had not yet received possession.

Q: Did the pens' continuing journey make the California stop incidental?

A: No. The letter treated the California gift as a use occurring after importation ceased.

Q: Did this letter decide the common-carrier method too?

A: It described the earlier distinction but reconsidered and affirmed only the affiliate-truck method.

Citations and references

• California Revenue and Taxation Code sections 6051 and 6201 (as cited)
• California Sales and Use Tax Regulation 1620(a), including (a)(3)(C)2.c, and (b)(1) and (b)(5) (as cited and quoted in part)
• Yamaha Corp. of American v. State Board of Equalization, 73 Cal. App. 4th 338 (1999), as printed in the source
• Board of Equalization, Hewlett Packard Company Memorandum Opinion (June 15, 2000)
• Removed Business Taxes Law Guide Annotation 570.1110 dated November 28, 1966 and its inaccurate backup letter — annotation cited by requester; removal and inaccuracy stated, but annotation and letter not reproduced in the official PDF
• Counsel's source-conflicted November 18/19, 2001 reconsideration letter and Senior Tax Counsel Graybill's August 29, 2001 memorandum to Vic Anderson — both listed as enclosures but not reproduced in the official PDF
• Affiliated California pen retailer and Mexican maquiladora's corporate relationship, unfinished-pen transfer, final assembly, mailing-house and forwarding agency, common-carrier and own-truck methods, driver authority, USPS delivery, donees, gift, title, importation, and foreign-commerce evidence — selected facts quoted; entity, agency, contracts, orders, invoices, shipping, customs, postal, title, donee, and delivery records not reproduced in the official PDF
• Official Annotation 280.0060's own-truck, California USPS delivery, control, title-passage, gift, and taxable-use summary — annotation supplies no additional enclosure, affiliate, agency, shipment, title, import, donee, or implementation record
• Possible assessment, payment, refund claim, audit disposition, appeal, judicial review, logistics change, or other agency action — no follow-up or final outcome supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0060
• Original supporting opinion: 280.0060 PDF

Original ruling text

280.0060
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) 324-2656
FAX (916) 323-3387

DEAN ANDAL
Second District, Stockton
CLAUDE PARRISH
Third District, Torrance

www.boe.ca.gov

JOHN CHIANG
Fourth District, Los Angeles
KATHLEEN CONNELL
State Controller, Sacramento

JAMES E. SPEED
Executive Director

March 28, 2002

Ms. S--- L. S----- --- LLP
XXX --- Street, Suite XXXX
--- ---, California XXXXX-XXXX
Re:

M--- M--- International SR --- XX-XXXXXX
I--- D--- T--- SR --- XX-XXXXXX

Dear Ms. S---:
This responds to your letter of November 18, 2001. You requested that we reconsider the opinions expressed in my memorandum of August 29, 2001 to Vic Anderson of this agency regarding certain transactions involving your clients, identified above. I apologize for the delay in responding. Copies of your November 19, 2001 letter and my August 29, 2001 memorandum are attached hereto. Your disagreement with my opinion was with respect to your client’s gift of promotional pens. You explained: “IDT is a manufacturer and retailer of pens with its principal place of business in California. To promote sales, IDT arranges for sample pens to be given away to prospective customers located within and outside California. “P--- N---, S.A. DE C.V. (P---), a separate legal entity affiliated with IDT, is a maquiladora located in Mexico. [ ] IDT arranges for unfinished pens to be delivered to P--- in Mexico for final assembly and processing. In addition to providing final processing, P--- acts as a mailing house and forwarding agent for IDT. P--- fulfills its obligations as forwarding agent in two ways.

Ms. S--- S---

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March 28, 2002
280.0060

“(1) By arranging for a common carrier to deliver promotional pens from Mexico for delivery through the United States Postal Service (USPS) to beneficial donees. “(2)

By delivering promotional pens from Mexico in its own
trucks for delivery through the USPS to beneficial donees.

“The August 29th memorandum distinguishes between these two methods of delivery in determining where a gift is complete. With regard to deliveries by common carrier, the memorandum finds that IDT completes a gift outside California (i.e. in Mexico). With regard to deliveries by P---, the memorandum finds that IDT completes a gift inside California (i.e. at the USPS in San Diego.) “IDT respectfully requests that the findings with regard to deliveries by P--- be reconsidered and revised for two reasons. First, the controlling authorities for determining when a gift is complete do not provide any basis for distinguishing between deliveries by common carrier and deliveries by P---, under IDT’s facts and circumstances. The controlling authorities look to where the donor divests control. As explained below, IDT divests control over the pens in Mexico in both cases such that a gift is completed in Mexico. “Second, the promotional pens begin a journey in foreign commerce in Mexico with delivery to the USPS in San Diego merely being an incidental step to completing the journey. Accordingly, delivery to the USPS in San Diego for redelivery to beneficial donees is exempt from use tax pursuant to Regulation 1620, Interstate and Foreign Commerce.” Discussion: After reconsidering your client’s activities, we are still of the opinion that pens driven in P--- trucks by P--- employees from Mexico into California, where they are delivered to the United States Postal Service (“USPS”), are used in California, and use tax applies to IDT’s gifts of such property. You asserted that the decision in Yamaha Corp. of American v. State Board of Equalization (1999) 73 Cal. App. 4th 338 (“Yamaha”) and the decision of the Board of Equalization in its Hewlett Packard Company Memorandum Opinion of June 15, 2000 (“H-P”) compel a different result. We disagree. As applied to IDT, Yamaha holds that IDT divested itself of control over the property in California, when the P--- driver, as IDT’s agent in the affiliated capacity, delivered the pens to the USPS in California. That the driver had limited authority does not change the fact that the driver is employed by P---, an affiliate of IDT, and that title never transfers from IDT until

Ms. S--- S---

-3-

March 28, 2002
280.0060

delivery of the pens to the USPS in California. The pens are effectively in the control of IDT until the USPS receives possession. We also disagree that the H-P Memorandum Opinion requires a different result. The facts described in the opinion are very specific, and the decision in Yamaha is carefully distinguished. In H-P, in addition to other factors, the donor entered into prior written agreements with the donees, which expressly stated that title to the gifted property would not pass until delivery by the carrier to the donee. We do not see such a title provision in IDT’s case, and in fact none could really exist, as the donees of the pens receive them as unanticipated promotional marketing material. For these reasons, we believe the Yamaha decision and the H-P Memorandum opinion compel a conclusion that use tax applies when IDT’s pens are delivered to the USPS in California. You also assert that Regulation 1620 compels a different result than the opinion in my August 29, 2001 memorandum, and you cited Annotation 570.1110 (11/28/66) in support of your position. Please note that Annotation 570.1110 was removed from the Business Taxes Law Guide because the back-up letter was found to have been inaccurate. With respect to Regulation 1620, no portion of subdivision (a) applies to these facts, because the pens are not sold in a sales tax transaction in interstate commerce. You asserted that pens had entered the stream of foreign commerce, and found support in Regulation 1620 (a)(3)(C)2.c. You further asserted that while subdivision (a) of Regulation 1620 addresses sales tax issues, the same standard must “apply for determining when property has entered the stream of foreign commerce for use tax purposes.” We disagree. Sales tax applies to the gross receipts from the retail sale of tangible personal property in this state. (Rev. & Tax. Code, §6051.) We are concerned instead with whether the use tax applies to IDT’s use of the pens in this state. (Rev. & Tax. Code, §6201.). Regulation 1620 (a)(3)(C)2 explains the conditions when sales tax does not apply to property exported to a foreign country. One of the conditions, set forth in the first full paragraph of the subdivision, is that the property “must be irrevocably committed to the exportation process at the time of sale….” The other condition, however, is that the property “must actually be delivered to the foreign country prior to any use of the property.” Because we have concluded that the gift occurred when the P--- driver delivered the pens to the USPS, then the use did in fact occur in California. Even if you could argue that the standard set forth in the sales tax provision of Regulation 1620(a) somehow applied here, the argument would fail, because the use of the pens occurred in California before they left the state. Because the gifting of pens is a use tax transaction, it is our opinion that subdivisions (b)(1) and (b)(5) of Regulation 1620 plainly establish that the use occurs in California, in the form of gifts, and such use is taxable. Subdivision (b)(1) states essentially the same use tax rule found in Revenue and Taxation Code section 6201. Subdivision (b)(5) states in full: “(b)(5) IMPORTS. Use tax applies with respect to purchases of property imported into this state from another country when the use occurs after the

Ms. S--- S---

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March 28, 2002
280.0060

process of importation has ceased and when sales tax is not applicable, regardless of whether the property is in its original package.” It is our opinion that under the facts here, the process of importation ceases when the P--- driver arrives at his destination in California, and the use occurs when the driver delivers the pens to the USPS, making the gift complete. For all of these reasons, we have concluded that the opinions stated in my August 29, 2001 memorandum correctly state the application of tax to your client’s transactions. If you have further questions, please write again. Sincerely,

Jeffrey H. Graybill
Senior Tax Counsel
JHG/ds
Enclosures
cc:

San Diego District Administrator (FH)