Who owed tax when lighting fixtures sold for resale were damaged in transit and the manufacturer billed the carrier?

Plain-English summary

A lighting-fixture manufacturer shipped goods to retail customers for resale. When a shipment was damaged in transit, one method gave the retailer full credit for the damaged goods, shipped and separately billed replacement goods to the retailer, and billed the carrier for the damaged property.

The retailer-side transactions were not taxable: the original sale was nullified by the full credit, and the replacement sale remained a sale for resale. Assuming the carrier took title and possession of the damaged goods, tax applied to the portion of its payment representing their fair retail value in damaged condition.

The carrier could avoid retail-sale treatment by giving a resale certificate and buying the damaged goods solely for resale. If the goods had to be junked and had no fair retail value, none of that billing was taxable. Under a different method where the manufacturer billed the carrier for the replacement item itself, the source treated the carrier's purchase as taxable.

Common questions

Was the replacement shipment to the retailer taxable?

No. The retailer bought the replacement for resale.

Under Method 1, how was the carrier's purchase of damaged goods measured?

By their fair retail value in damaged condition, unless the carrier bought them for resale with a resale certificate.

What if the damaged fixtures had to be discarded?

Their fair retail value would be zero, so no part of the carrier billing for those damaged goods would be taxable.

Citations and references

• Cal. Code Regs., tit. 18, reg. 1629 — tax treatment of payments involving goods damaged in transit
• Annotation 290.0060 — cited in the source for taxable replacement-goods sales to carriers; named here without an unverified internal link
• Inglewood Auditing's June 28, 1978 memorandum, James Mahler's Sept. 20, 1977 memorandum concerning M. S. E., E. C. M. Jr.'s Apr. 25 memorandum, and an updated carrier letter — facts, two methods, and prior analysis supplied; memorandums, letters, attachments, audit report, and workpapers not reproduced in the official PDF
• Lighting fixtures, retailer resale, original billing and full credit, replacement shipment and separate invoice, carrier billing, possession and title, damaged-condition fair retail value, resale certificate, junking, replacement-item purchase, and consignee claim — facts and assumptions supplied; sales and shipping contracts, invoices and credits, claims, inspection and damage reports, carrier settlements and payments, title records, certificates, salvage or disposal evidence, valuations, returns, and tax computations not reproduced in the official PDF
• Official Annotation 290.0150's Method 1 retailer credit, replacement resale, carrier damaged-goods purchase, fair-value measure, certificate, and zero-junk-value summary — annotation omits Method 2's taxable carrier purchase of the replacement item and the prior memorandums and supplies no additional transaction or audit record
• Possible later carrier settlement, damaged-goods resale or disposal, replacement sale, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/290-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/290-0150.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Inglewood – Auditing (JKI)

From:

Tax Counsel (GJJ) – Headquarters

Subject:

T--- Manufacturing Co., Inc.

290.0150

Date:

August 14, 1978

SR -- XX-XXXXXX

This is in response to your memorandum of June 28, 1978. You have raised certain questions with respect to the proper application of the tax to transactions involving --- --- --- [U], a common carrier of goods. Mr. James Mahler of our staff wrote to you on September 20, 1977, in regard to this subject. See memorandum of that date concerning M--- S---E---, Inc. Before considering the facts at hand a few general comments are in order. As you are aware, Regulation 1629 explains the application of tax insofar as “goods damaged in transit” are concerned. This regulation concerns itself with the proper application of the tax to payments made to retailers insofar as damaged goods are concerned. The regulation does not purport to explain the application of the tax to sales of replacement goods by a retailer to his customer or by a retailer to a carrier for delivery to a retail customer. As you are aware Annotation 290.0060 does state a rule concerning sales of replacement goods to carriers. The rule is that a sale to a carrier for purpose of the carrier’s replacing an item damaged in transit in settlement of a claim filed by a consignee against the carrier is treated as a retail sale and not a sale for resale. Turning to the facts of this case as outlined in Mr. E. C. M---, Jr.’s memorandum to you of April 25, we understand that there are two methods of filing claims for damaged merchandise where delivery is made by U. We note that the taxpayer in this case, T--- Manufacturing Co., Inc., is a manufacturer of lighting fixtures who sells the fixtures to retailers for the purpose of resale. In Method 1 the merchandise is shipped by T--- and billed to its retail customer. The merchandise is damaged enroute. The customer is given credit for the damaged merchandise and

Inglewood – Auditing (JKI)
(SR -- XX-XXXXXX)

-2-

August 14, 1978
290.0150

the replacement is shipped by T--- and billed to the retailer under a separate invoice. U is then billed for the damaged merchandise. It is clear that tax does not apply to the charges made by T--- to its retail customer. As to the merchandise originally shipped, full credit is given; as to the replacement merchandise, the sale is a sale for resale. The question is – how does tax apply to charges made to U for the damaged merchandise? We assume that U acquires possession and title to the damaged merchandise. Tax applies to that portion of the total amount paid to T--- representing the fair retail value of the goods in the damaged condition unless U issues to T--- a resale certificate. If U purchases the damaged merchandise solely for the purpose of reselling it, the sale to U is not a retail sale and is not taxable. If the merchandise is damaged beyond use and will be thrown away by U, no portion of the charge is taxable since the fair retail value of goods in their damaged condition would be zero. In Method 2 the merchandise is shipped by T--- and billed to its retail customer. The merchandise is damaged enroute. T--- ships a replacement via U and bills U “for the merchandise.” We assume that the billing to U is for the replacement item. In accordance with the analysis contained in Mr. Mahler’s memorandum of September 20, 1977, and the conclusions stated in Annotation 290.0060, tax applies to the charge to U for the replacement item. The updated letter from Mr. G--- P. S--- of U accompanying your memorandum does not change this conclusion. That letter concerns itself with ownership of the original merchandise, not the replacement merchandise.

j:alicetilton

cc:

Mr. J. E. Mahler