When was an exchange of used property for reconditioned property taxed only on the exchange price?

Plain-English summary

California said the special reconditioned-property rule applied only when the item given to the customer was virtually identical to the used item the customer surrendered. That exchange was functionally equivalent to reconditioning the customer's own property, so tax applied only to the added value or exchange price.

If the two items were not virtually identical, the transaction was a trade-in under Regulation 1654. Tax then applied to the exchange price plus the trade-in allowance. Exchanging a reconditioned shotgun for a used rifle fell into the trade-in rule; an exchange involving two shotguns depended on how closely the two guns matched.

Common questions

Was the same general type of property enough?

No. The source required virtual identity.

What was taxed when the items were virtually identical?

Only the exchange price or value added.

What was taxed when they differed?

The exchange price plus the trade-in allowance.

Citations and references

• California Code of Regulations, title 18, Regulations 1546(b)(4) and 1654(b)(1)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/315-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/315-0410.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Frank Zuppan
Return Review Unit

From:

Stella C. Levy
Tax Counsel

Subject:

Reconditioned Gun/C--- S--SR – XX-XXXXXX

315.0410

November 29, 1990

This is in response to your October 12, 1990 memorandum requesting a response to the following questions. 1. What is the sales tax obligation of a gun retailer who exchanges a reconditioned shotgun for a used shotgun? 2. Would the results differ if the retailer exchanged a reconditioned shotgun for a used rifle? Generally, exchanges and trade-ins are governed by Regulation 1654 which provides that taxable gross receipts include the value of merchandise traded in or exchanged. The only situation under which the value of merchandise traded in is excluded from taxable gross receipts is that described in Regulation 1546(b)(4). In order for Regulation 1546 to apply, the reconditioned property must be identical to the property delivered by the customer. Since this type of transaction is the functional equivalent of one in which the customer’s property is reconditioned, it is subject to the equivalent tax treatment – tax applies only to the added value or exchange price of the reconditioned property. Typically, Regulation 1546 applies when used automobile parts or airplane parts are replaced by reconditioned parts. Applying these concepts to your questions, it is clear that only Regulation 1654 applies to question two. Either Regualitn 1546 or Regulation 1654 could apply to your first question, depending on the degree of identity between the shotguns. The criterion one would use, in order to determine which regulation to apply, would be whether the customer’s used property would, when reconditioned, be virtually identical to the already reconditioned property he or she will receive in exchange. If the properties are identical, tax applies only to the exchange price; if the properties differ, tax applies to the exchange price plus the trade-in allowance for the used property. SL;cs 0043E