Did sales tax apply when a mold contract was canceled before any property or title was transferred?

Plain-English summary

A customer contracted for steel molds used to make orthotic foot appliances. The completed molds were unusable, the contract was canceled, and no tangible personal property was transferred to the customer. The customer planned to reimburse the fabricator for labor and asked about an amount the fabricator described as tax.

The Board assumed, because it did not have the contract, that title did not pass before delivery. On that assumption, no taxable sale occurred because neither title nor possession of tangible personal property was transferred. The fabricator therefore could not collect sales-tax reimbursement from the customer.

The fabricator could still owe use tax on property it consumed during the contract after acquiring that property tax-free for resale. Whether the customer had contractually agreed to reimburse that use-tax liability could not be determined without the contract. If reimbursement was required, the letter said it should not be labeled sales tax.

Key distinction

• No transfer of title or possession meant no retail sale to the customer.
• The fabricator's own use of resale inventory was a separate possible use-tax issue.
• Contractual reimbursement of use tax was different from collecting sales-tax reimbursement on a sale.

Citations and references

• California Revenue and Taxation Code sections 6006 and 6051 (as cited)
• California Civil Code section 1656.1 (as cited)
• November 17, 1993 request describing the mold contract, unusable completed molds, cancellation, no property transfer, planned labor reimbursement, and fabricator's tax-recovery request — letter not separately reproduced beyond the response's summary
• Unprovided mold contract controlling pre-delivery title and possible use-tax reimbursement — contract expressly absent from Board review
• Fabricator's ambiguous statement that it paid sales tax on molds and supplies, which did not show whether tax was paid to vendors or on the intended customer sale — purchase invoices, resale certificates, tax payments, returns, materials-use records, and reimbursement documents not reproduced in the official PDF
• Official Annotation 295.0765's mold fabrication, unusable property, cancellation, labor reimbursement, no transfer, title-before-delivery condition, no-sale result, and consumer treatment with Dec. 29, 1993 date — annotation changes the source's planned reimbursement to a completed one and omits the formal page's “19932” typo, request provenance, absent contract and express assumptions, ambiguous tax payment, sales-tax-reimbursement and possible use-tax-reimbursement distinctions, missing records, reliance status, and later outcome and supplies no additional transaction record

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/295-0765.pdf

Original ruling text

295.0765

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

December 29, 19932

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. L--- R. S---, D.P.M.
A--- Inc.
XXX --- --- ----- ---, CA XXXXX
Re:

Application of Tax to Canceled Contract
for Sale of Molds

Dear Mr. S---:
This is in response to your letter dated November 17, 1993. You state in your letter that A--- entered into a contract with F--- T--- and E--- (F---) to construct a set of steel molds to be used in the production of orthotic foot appliances. The molds that were constructed could not be used for the purpose for which they were intended. The contract was canceled and no tangible personal property was transferred to A---. You are, however, planning to reimburse F--- for the labor incurred. You state in your letter that F--- has “paid sales tax on the molds and supplies that were used to construct the molds” and is now seeking recovery of “that tax” from you. It is unclear from your letter whether F--- paid sales tax on its purchases of the supplies from its vendors or whether F--- has paid sales tax on its intended sale to you. I assume that your inquiry relates to whether sales tax is applicable to F---’s charges to you. Discussion Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Although the sales tax is imposed upon the retailer, the retailer may collect sales tax reimbursement (usually itemized on the invoice as “sales tax”) from the purchaser if the contract of sale so provides. (Civ. Code
§ 1656.1.)

Mr. L--- R. S---

-2-

December 29, 1993
295.0765

Under the facts of your letter, F--- must pay sales tax, and may collect reimbursement from you if your contract so provides, if there has been a sale of tangible personal property. A “sale” is defined in Revenue and Taxation Code section 6006 to include: “(a) Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. (Emphasis added.) We were not provided with a copy of a contract for the sale of the molds. I assume that the contract did not contain a provision providing for the passage of title of any tangible personal property to A--- prior to actual delivery of the tangible personal property. Although both parties had originally contracted for the transfer of tangible personal property, there has been no transfer of any tangible personal property. As such, no taxable sale has occurred. Since F--- did not make a taxable sale, it may not collect reimbursement from you for any sales tax. However, please note that F--- owes use tax with respect to any property it used during the contract which it acquired ex-tax for resale. Without reviewing your contract, we are unable to ascertain whether F--- is entitled to reimbursement from you with respect to such possible use tax liability. If your contract does require you to reimburse F--- for its use tax liability, that reimbursement should not be called “sales tax”. If you have any further questions, please do not hesitate to write again. Sincerely,

Ms. Sukhwinder K. Dhanda
Staff Counsel
SKD:plh