Did liquidated damages paid by a seller to the buyer reduce the contract sales price subject to use tax?

Plain-English summary

The stated contract price remained the sales price subject to use tax even when the seller's breach triggered a liquidated-damages payment to the purchaser. The damages provision was not a pricing mechanism.

The same rule applied to litigation awards and settlement payments, including payments the parties called voluntary price adjustments. Those seller-to-purchaser payments did not reduce the original selling price.

Source-history note

The supporting letter is formally dated July 30, 1976 and confirms advice given two days earlier. The live annotation also displays Aug. 26, 2004 and “Am. 2004–2,” but does not provide the amendment text, reason, or source.

Citations and references

• California Revenue and Taxation Code section 6011 (as cited)
• Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652 (1972) (as cited)
• Tax counsel's July 28, 1976 advice on whether liquidated damages could offset stated contract price for use-tax purposes — confirmed by the published letter; prior advice itself not reproduced in the official PDF
• Conflicting prior Board advice on the same subject — acknowledged and apologized for; advice, dates, authors, recipients, reasoning, and withdrawal or correction records not reproduced in the official PDF
• Possible tangible-personal-property contract, liquidated-damages provision, litigation award, settlement, and voluntary price adjustment — discussed as categories; no particular contract, clause, property, parties, amounts, breach, award, settlement, payment, or transaction records supplied in the official PDF
• Official Annotation 295.0368's stated-contract-price, seller-breach, liquidated-damages, settlement, voluntary-price-adjustment and no-pricing-mechanism conclusions, case citation, July 30, 1976 date, Aug. 26, 2004 date, and “Am. 2004–2” notation — annotation supplies no 2004 amendment text, reason, source, or transaction record and omits the July 28 confirmation, conflicting-advice provenance and apology, section 6011, missing records, and later outcome
• Possible contract performance, breach, damages award, settlement, payment, use-tax filing, audit, assessment, refund claim, appeal, correction of prior advice, or other later 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/295-0368.pdf

Original ruling text

295.0368

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-2641

July 30, 1976

Mr. G--- F--Deputy General Counsel
M--- W--- District
P.O. Box XXXXX
--- ---, California XXXXX

Dear Mr. F---:
SS -- XX XXXXXX
This will confirm our advice to you of July 28, 1976. The question has arisen as to whether liquidated damages may be offset against the stated contract price of tangible personal property in determining the measure of California use tax. You have received conflicting advice from this Board. The California use tax is measured by the “sales price” of tangible personal property. Revenue and Taxation Code Section 6011 defined “sales price” to mean the total amount for which tangible personal property is sold, valued in money, whether paid in money or otherwise, without any deduction on account of the cost of any expense. The total amount for which property is sold includes any amount for which credit is given to the purchaser by the seller. It is the position of this Board that the stated contract price of tangible personal property is the “sale price” subject to the use tax without regard to the fact that breach of certain terms of the contract by the seller may occasion operation of a liquidated damages provision. It is clear that a reduction of the selling price of tangible personal property is not effected by an award of damages resulting from litigation concerning the contract or by a payment by the seller to the purchaser in settlement of claims for damages made by the purchaser. This rule applies even where the parties characterize the settlement payments as “voluntary price adjustments.” See Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652.

Mr. G--- F---

-2-

July 30, 1976
295.0368

It is our view that a liquidated damages provision may not be regarded for sales and use tax purposes as a pricing mechanism. We apologize for any inconveniences which our prior advice on this subject may have occasioned you. Very truly yours,

Gary J. Jugum
Tax Counsel
J:alicetilton
cc:

Mr. T. P. Putnam
Assistant Chief Counsel
State Board of Equalization

bc:

-- – District Administrator