Did time spent assembling, testing, disassembling, and shipping machinery count as out-of-state functional use under California’s historical 90-day rule?

Plain-English summary

A packaging manufacturer bought components for blow-molding and trimming machines, assembled them in Ohio, then disassembled and shipped them to its California plant. Its capital request showed California as the intended use location from the project's beginning.

Under Regulation 1620(b)(3) as then written, only use for the machinery's designed purpose counted toward prior out-of-state functional use. Assembly, disassembly, testing, preparation for shipment, and shipment did not count.

The taxpayer supplied a letter saying the blow-molding machine ran in Ohio but did not document actual production, and provided no comparable evidence for the trimmer. The hearing officer found insufficient proof of any qualifying out-of-state functional use and recommended leaving the use-tax determination unchanged.

The project began in 1984, the lessor's letter covered August through December, wiring and piping invoices showed hookup was incomplete until mid- or late September, and shipment to the California plant occurred on or about January 5, 1985. The hearing officer said assembly, testing, disassembly, shipment preparation, and shipment could not establish the claimed more-than-90-day functional use.

The September 26 hearing concerned a 1984–1986 audit item labeled self-consumed fixed assets purchased ex-tax, with stated state/local/county/LACT and transit-district measures of $1,631,709 and $934,789. The petitioner did not appear. The petition, audit schedules, capital request, lessor letter, invoices, exhibits, transcript, tax calculation, and final Board action are absent.

Common questions

What was the machinery's designed purpose?

The blow-molding and associated trimming machines were packaging-production equipment. Counsel required proof of actual functional production use rather than time spent building, connecting, testing, taking apart, or shipping them.

Why did the Ohio lessor's letter not prove the claim?

It said the blow-molding machine was installed and ran from August through December 1984 but did not establish actual production. It did not mention the trimmer, and hookup invoices indicated wiring and piping remained incomplete until mid- or late September.

What evidence showed California intent?

The company's capital expenditure request identified California as the location of intended use from project inception. The officer acknowledged intent could change before fabrication ended but found no sufficient functional-use evidence showing a change.

Did assembly and testing count toward the historical 90 days?

No under the recommendation. Only actual designed-purpose use outside California counted; assembly, disassembly, testing, preparation for shipment, and shipment did not.

What happened at the hearing?

The petitioner made no appearance. A senior tax auditor represented the Out-of-State District at the September 26, 1990 Sacramento hearing. The official PDF supplies no transcript, exhibits, service record, or explanation for the absence.

How much tax was finally due?

The source reports two protested tax-liability measures, not a final tax amount, and recommends redetermination without adjustment. It supplies no rate calculation, adopted decision, final redetermination, assessment, payment, claim, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code section 6201 — cited for California use tax and purchase intent; complete authority, measure, exceptions, procedures, amendments, later history, and current law not supplied
• California Sales and Use Tax Regulation 1620(b)(3) — quoted and applied for functional use, entry timing, and excluded activities; complete and correct historical text, counting and proof rules, amendments, later history, and current law not supplied
• Capital request, lessor letter, hookup invoices, audit, petition, hearing, and November 6 recommendation — no underlying records, exhibits, transcript, tax computation, adopted decision, assessment, payment, claim, appeal, or later outcome supplied
• Official Annotation 325.0018's historical rule and date — omits almost all facts, evidence, amounts, hearing provenance, authority, recommendation, missing records, final outcome, and reliance status and supplies no additional machinery 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/325-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0018.pdf

Original ruling text

STATE OF CALIFORNIA

325.0018

BOARD OF EQUALIZATION
APPEALS UNIT

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
L--- CORP.
Petitioner

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HEARING
DECISION AND RECOMMENDATION

No.

SZ -- XX XXXXXX-040

The above-referenced matter came on regularly for hearing before Hearing Officer H. L. Cohen on September 26, 1990 in Sacramento, California. Appearing for Petitioner:

No appearance

Appearing for the Department
Of Business Taxes:

Mr. Grant Elliot
Senior Tax Auditor
Out-of-State District
Protested Item

The protested tax liability for the period January 1, 1984 through December 31, 1986 is measured by:

D.

Item

State, Local
County & LACT

Transit
District

Self-consumed fixed assets
purchased ex-tax

$1,631,709

$934,789

Contention
Petitioner contends that the machinery in question was used substantially outside California before it was brought into the state.

L--- CORP.
SZ -- XX XXXXXX-040

-2-

November 6, 1990
325.0018

Summary
Petitioner is a corporation engaged in the manufacture and sale of plastic film products, plastic containers, and packaging machinery. The last prior audit was for the period through December 31, 1983. The auditor notes that petitioner has manufacturing plants in several states. Much of the machinery used in these plants is first constructed or assembled at petitioner’s Ohio plants. In 1984, petitioner purchased components for a blow-molding machine and an associated trimmer machine, which were assembled by petitioner’s personnel in Ohio at facilities leased from W--I---, Inc. Later, the machines were disassembled for shipment to petitioner’s --- ---, California plant. Shipment was on or about January 5, 1985. Petitioner prepared capital expenditure requests for all capital asset projects. This form includes a description of the property, location of intended use, and approvals by authorized personnel. The request for this project indicated that from inception of the project, petitioner intended to use the machines in California. Petitioner contends that the machinery in question was used outside California for more than 90 days prior to shipment to California and should thus be presumed to have been purchased for use outside California. Petitioner submitted a letter from the lessor of the Ohio facility at which the machinery was assembled. The letter states that the blow-molding machine was installed and ran from August 1984 to December 1984. No mention is made in the letter of a trimmer machine. The auditor points out that some of this time would have been required for assembling, test, and disassembling. The invoices for wiring and piping indicate that the hookup was not complete until the middle or end of September. The auditor requested petitioner to provide evidence as to the extent of use of the machine and actual production in Ohio. No such evidence was provided. Analysis and Conclusions Section 6201 of the Revenue and Taxation Code imposes the use tax on the storage, use or other consumption in this state of tangible personal property purchased from a retailer for the purpose of such storage, use or other consumption in this state. The machinery here was used in California. It is tangible personal property. It was purchased from a retailer. The sole remaining question is whether it was purchased with the intention of using it in California. The capital expenditure request indicates that the initial intent of petitioner was to build the machine for use in California. Petitioner could, of course, change his mind prior to completion of the fabrication of the machines. Sales and Use Tax Regulation 1620 provides, in subdivision (b)(3):

L--- CORP.
SZ -- XX XXXXXX-040

-3-

November 6, 1990
325.0018

“Property purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the property is in California. When the property is first functionally used outside of California, the property will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, unless the property is used or stored outside of California one-half or more of the time immediately following its entry into this state. Prior out-of-state use not exceeding 90 days from the date of purchase to the date of entry into California is of a temporary nature and is not proof of an intent that the property was purchased for use elsewhere. Prior out-of-state use in excess of 90 days from the date of purchase to the date of entry into California, exclusive of any time of shipment to California, or time of storage for shipment to California, will be accepted as proof of an intent that the property was not purchased for use in California. “For purposes of this subparagraph, ‘functional use’ means use for the purposes for which the property was designed.” Only functional use outside the state is counted in establishing out-of-state use. Time for assembly, disassembly, testing, preparation for shipment, and shipment do not count. The evidence here is not sufficient to establish actual functional use outside California for 90 days or any other period of time prior to the arrival of the machines in California. Accordingly, I conclude that the auditor was correct in applying the use tax here. Recommendation Redetermine without adjustment.

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Herb L. Cohen, Hearing Officer

11/6/90
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Date