Was an out-of-state transfer of computers to California schools a gift or loan when schools could use them freely but had to return or destroy them when obsolete?

Plain-English summary

A computer manufacturer planned to transfer computers from outside California to educational institutions in California. Schools could use them freely but, when obsolete, had to return or destroy them.

Legal staff classified the transfer as a gift subject to a condition, not a loan. The decisive fact was that the school had no absolute duty to return the computer; destruction was an alternative.

Because the gift and title transfer were stated to occur outside California, the memorandum said the manufacturer owed no California use tax. An absolute return obligation would instead have indicated a loan and California use, despite language saying title passed.

What this means for you

Return-or-destroy terms can differ materially from an unconditional duty to return property. Document title and recipient obligations precisely.

Citations and references

• The source memorandum cites no statute or regulation by number.
• Manufacturer inquiry and staff discussion — proposed facts and conclusion supplied; dates, inquiry, attachments, discussion record, and colleague identity not reproduced in the official PDF
• Out-of-state shipment, selected California institutions, unrestricted use, nonalienation, obsolescence, alternative return or destruction, and out-of-state title passage — proposed facts supplied; computer identities and costs, institution selection and acceptance, transfer agreements, title documents, shipping and delivery records, use, obsolescence findings, returns, and destruction evidence not reproduced in the official PDF
• Official Annotation 280.0670's transfer, return-or-destroy term, conditional-gift classification, and absolute-return loan distinction — annotation omits the express no-tax conclusion and supplies no additional agreement, shipment, use, return, or destruction record
• Possible later transfer, delivery, school use, obsolescence, return, destruction, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0670
• Original supporting opinion: 280.0670 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
280.0670
To:

Business Taxes Attorneys
Hearing Officers

From:

Gary J. Jugum

Subject:

Sale - - Return or Destroy

Date:

May 14, 1984

We recently received an inquiry from a computer manufacturing company which is planning to transfer personal computers to selected educational institutions in this state. The recipient institution is free to use the property as it sees fit. However, the institution is under the obligation to return the property to the manufacturer or destroy the property when the property becomes obsolete. By terms of the transfer, title is said to pass to the educational institution outside this state. The property is shipped by the manufacturer from a point outside this state to the educational institution in California. The question is, are these gifts or are these loans? If there is a gift, the manufacturer owes no California use tax because the gift occurs out of state. If there is a loan, then the manufacturer owes use tax because there is a use in this state.
--- --- and I discussed this matter and concluded that there is a gift subject to a condition and not a mere loan. The critical fact is that although the transferee may not alienate the property, the transferee has no absolute duty to return the property but may alternatively destroy the property upon obsolescence. If there was an absolute duty to return the property we would treat the transaction as a loan (despite the title provision) because an absolute obligation to return would be incompatable with a transfer of title.