Which amount measured tax when a trailer manufacturer invoiced its subsidiary provisionally and adjusted the price to actual cost plus profit at year end?

Plain-English summary

A trailer manufacturer initially invoiced its wholly owned leasing subsidiary at an arbitrary predetermined amount. At fiscal year end, it calculated actual direct and indirect production costs plus profit and charged the subsidiary the difference.

Tax counsel concluded that the final adjusted amount was the taxable purchase price. That price included the additional overhead, labor, materials, and profit agreed upon by the related companies.

Because the subsidiary had elected to report tax on its trailer purchase price, it could report the corrected final amount and did not have to switch to tax measured by rental receipts.

Source-date note

The supporting memorandum is dated October 12, 1967. Although the annotation index gives October 11, the complete PDF contains no October 11 document.

Citations and references

• The official memorandum cites no statute or regulation by number.
• Trailer construction and transfers, related-party agreement, direct and indirect costs, overhead, labor, material, profit, year-end differential charge, subsidiary leasing, tax reported on provisional price, purchase-price election, corrected reporting, and rental receipts — facts and conclusions supplied; corporate ownership records, transfer and pricing agreements, trailer identities, invoices, cost ledgers, allocation workpapers, year-end entries, payments, lease records, election, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0020's manufacturer, wholly owned leasing subsidiary, arbitrary invoice, year-end actual costs and profit, differential charge, and final taxable purchase-price summary dated Oct. 11, 1967 — annotation conflicts with the PDF's Oct. 12 date, omits the reporting-election conclusion, and supplies no additional transaction record
• Possible later price adjustment, corrected return, 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/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0020.pdf

Original ruling text

State of California

Memorandum

To:

Los Angeles – Dist. Prin. Aud. (JTQ)

From:

Tax Counsel (GAT)

Board of Equalization

295.0020

Oct. 12, 1967

Your letter of September 27, 1967 has been referred to the undersigned for reply. It is our understanding the “R” builds trailers and sells them to “A”, it wholly owned subsidiary. When a particular trailer is transferred, “R” makes out an invoice indicating an arbitrary selling price. This is a predetermined price and tax is reported thereon by “A”. At the end of the fiscal year, “R” determines its actual, direct and indirect costs for producing the trailers plus an amount for profit, and charges “A” for the difference between the originally invoiced selling price and the actual price as redetermined. Thus, at year’s end, “R” makes an adjustment of the selling price of the trailers. In our opinion, the adjusted selling price of the trailers including the additional charges for overhead, labor, material, and profit as redetermined by “R” and agreed to by “A”, is the taxable purchase price. It is further our opinion that “A”, having elected to report tax on the purchase price of the trailers, may report tax on the correct amount and is not required to report tax measured by rental receipts.

GAT:smk