Could a buyer exclude amounts labeled severance costs or going-concern value from the price of tangible personal property?

Plain-English summary

Tax counsel concluded that amounts labeled severance costs and going-concern value remained in gross receipts from a sale of tangible personal property.

Severance costs were seller expenses, which could not be deducted from the agreed sale amount. Although the buyer described going-concern value as fictional, it was still part of what the parties agreed would be paid and therefore belonged in gross receipts.

The letter separately noted a law change effective September 17, 1965: transmission and distribution lines in place would become real property for sales-tax purposes, except that pre-effective-date contracts remained governed by prior law. A sale for purchaser removal was also treated differently under the described change.

Citations and references

• California Revenue and Taxation Code section 6012, including quoted gross-receipts provisions for the total sale amount, seller expenses, services that are part of a sale, and installation or application labor (as cited)
• California Assembly Bill 1086 (1965), described as prospectively treating transmission and distribution lines in place as real property for sales-and-use-tax purposes beginning September 17, 1965, while preserving prior law for sales under contracts entered before that date — bill text, chapter number, enactment record, and contract not reproduced in the official PDF
• August 25 purchaser letter addressed to the San Jose District office — request, attachments, and district referral record not reproduced in the official PDF
• Proposed purchase from the redacted G company, amounts designated as going-concern value and severance costs, an estimate characterized by the purchaser as fictional, and assumed transmission or distribution lines — sale agreement, asset list, allocation, appraisal, severance invoices, line-location records, and removal plans not reproduced in the official PDF
• September 15, 1965 tax-counsel response signed by E. H. Stetson — no purchaser reply, completed sale, tax return, audit, assessment, refund claim, agency adoption, appeal, or later outcome supplied
• Official Annotation 295.1400's severance-cost and going-concern-value holding and September 15, 1965 date — annotation omits the request and referral, section 6012 quotations, assumed utility-line facts, Assembly Bill 1086 discussion, pre-effective-date-contract qualification, missing records, later outcome, and reliance status and supplies no additional proceeding 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/295-1400.pdf

Original ruling text

295.1400

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

September 15, 1965

Gentlemen:
Your letter of August 25 addressed to our San Jose District office has been referred to this office for reply. You question the application of sales tax to what the “G” company designates as “going concern” value and “severance costs”. The sales tax is measured not by value, but by gross receipts from the sale, which is the amount agree to be paid for the property transferred. Section 6012 of the Sales and Use Tax Law defines “gross receipts” to include the total amount of the sale price without any deduction on account of “(b) The cost of the materials used, labor or service cost, interest paid, losses, or any other expense”, and also provides that the sale price includes “(a) Any services that are a part of the sale.” Excluded from the definition of gross receipts is “(c) The price received for labor or services used in installing or applying the property sold.” (Emphasis added.) From this, it appears that the “severance costs” amount simply to one of the seller’s expenses, which would not be deductible from gross receipts. The so-called “going concern” value, which you state is an estimate of a fictional value, is, nevertheless, part of what is agreed to be paid and as such appears to us to be within the definition of gross receipts. We assume that at least a part of the property which you are purchasing from “G” consists of transmission or distribution lines. Although these have always been treated as personal property, commencing September 17, of this year, by virtue of passage of AB 1086 at the 1965 session of the Legislature transmission and distribution lines in place will cease to be personal property for sales and use tax purposes. They will be real property, the sale of which unless for purposes of removal by the purchaser will not be subject to sales tax, because the sale will be a sale of real property. AB 1086 provides, however, that the change is prospective only, and the law as it existed prior to September 17 shall continue in full force and effect as respects the application of tax to sales under a contract entered into before September 17, the effective date of the act. Very truly yours,

E. H. Stetson
Tax Counsel

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