Did a Georgia carpet manufacturer owe California use tax when it sent free samples through its California employees to retailers?

Plain-English summary

A Georgia carpet manufacturer preaddressed free samples to California retailers but shipped them first to its own California employees. Those employees then forwarded the samples to the retailers.

The memorandum concluded that the manufacturer retained ownership until its employees made the deliveries. It therefore made a taxable California use when the employees forwarded the samples as gifts; preaddressing them in Georgia did not keep the property continuously in interstate commerce.

Applying Complete Auto Transit, the memorandum found substantial California nexus, fair apportionment, no interstate discrimination, and a relationship to state services supporting the manufacturer's California sales activity. If Georgia also taxed the gift when the samples left inventory there, section 6406 provided a credit for tax paid to Georgia.

The memorandum also analogized to sales-tax rules: a resident employee's home can be an out-of-state retailer's California place of business when the employee performs substantial services related to the retailer's functions, particularly sales.

The district had supplied three earlier Legal-staff memoranda reaching the opposite result on a continuous-interstate-commerce theory. The response identifies only an April 3, 1967 Glenn R. Rigby memorandum, says those opinions used a Commerce Clause approach predating Complete Auto Transit, and distinguishes the later employee-home rule in Regulation 1620.

The Georgia credit was conditional, not an established payment. The memorandum says section 6406 would allow credit if Georgia treated withdrawal and addressing as the gift and imposed its use tax; it provides no Georgia return, assessment, payment, or credit record.

No sample, inventory, shipment, employee-duty, retailer-delivery, audit, tax-calculation, assessment, payment, claim, appeal, or later-outcome record is supplied. The live annotation gives only the retained-ownership and California-gift result.

Common questions

When did the manufacturer make the taxable use?

When its California employees forwarded the carpet samples to the retailers as gifts. Until then, the memorandum treated the manufacturer as retaining ownership despite the Georgia addressing.

Why did preaddressing the samples not complete the gifts in Georgia?

The manufacturer shipped the property to its own California employees and regained possession through them before delivery to the donees. The source therefore rejected continuous interstate transit to the retailers.

How did the memorandum apply the Complete Auto test?

It found California nexus in bringing property here for gifts, apportionment because the described gift use occurred here, no discrimination because California taxed comparable in-state inventory withdrawals at the same rate, and a fair relation to services supporting the manufacturer's California employees and retailer relationships.

Was credit for Georgia tax actually established?

No. Counsel said section 6406 provided credit if Georgia imposed use tax on the inventory withdrawal and addressing. No Georgia tax or payment record is supplied.

Why did counsel reject the older staff memoranda?

Counsel said they relied on a Commerce Clause approach predating Complete Auto Transit. The letter also said Regulation 1620 had replaced former Ruling 55 and could treat a qualifying resident employee's home as the retailer's California place of business.

Does the PDF show the audit result?

No. It contains a response to facts presented by telephone, not the complete audit, tax computation, assessment, payment, claim, appeal, or later disposition.

Citations and references

• United States Constitution article I, section 8, clause 3 and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 — quoted for the four-part interstate-commerce tax test; complete authorities, facts, procedure, later treatment, and current doctrine not supplied
• California Revenue and Taxation Code section 6406 — cited for conditional Georgia-tax credit; complete authority, proof and payment conditions, amendments, later history, and current law not supplied
• Standard Pressed Steel Co. v. State of Washington Department of Revenue, 419 U.S. 560, 562 — cited for state services and employee-supported contractual relations; complete opinion, facts, procedure, and later treatment not supplied
• Former Ruling 55(a)(1)(A)3 and California Sales and Use Tax Regulation 1620(a)(2)(A) — cited for interstate sales and qualifying employee homes as a retailer place of business; complete authorities, transition, every condition, amendments, later history, and current law not supplied
• Three earlier staff memoranda, including the April 3, 1967 Rigby memorandum — only one is identified and none is reproduced; complete facts, reasoning, authority, adoption, later history, and current status not supplied
• May 29 inquiry and August 17 response — no transaction, employee, Georgia-tax, audit, assessment, payment, claim, appeal, or later-outcome records supplied
• Official Annotation 325.0115's historical summary and date — omits the contrary staff history, constitutional and credit analysis, sales-tax analogy, missing records, applied outcome, and reliance status

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/325-0115.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State District (JF)

From:

Legal (RLD)

Subject:

Application of Use Tax to Use of Carpet Samples

325.0115

Date:

August 17, 1987

This is in response to your telephone inquiry of May 29, 1987, to Tax Counsel James Mahler. We understand that, during your audit of a carpet manufacturer in Georgia, you uncovered the following factual situation. The manufacturer in Georgia gives samples of carpets to California retailers for use by the retailers. The manufacturer places the address of the California retailer on the samples in Georgia and ships the samples by common carrier to the manufacturer’s employees in California. The manufacturer’s employees then forward the samples to the California retailers. Given these facts, you asked whether the manufacturer is responsible for payment of California use tax. We believe that, under the facts you presented, the Georgia manufacturer makes a taxable use of the carpet samples at the time that the employees in California forward the carpet samples to the California retailer. We further believe that, until that time, the manufacturer has not relinquished ownership of the samples notwithstanding that the manufacturer may have preaddressed the samples out of state. You sent for our review a copy each of three memoranda in which, under similar circumstances, the Board’s legal staff took the position that the use tax would not apply in such a situation on the basis that the property would be continuously in interstate commerce from the time it is shipped until the delivery to the addressees in California. We disagree with that conclusion when the fact show, as here, that the donor ships property to California and regains possession of the property before delivering it to the donee. In the case Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, the United States Supreme Court provided the contemporary approach to the ability of a state to impose taxes directly upon businesses engaged in interstate commerce activities within the taxing state. The court interpreted the commerce clause of the United States Constitution (U.S. const., Art. I, § 8, Cl. 3) as requiring that a state tax will be valid only if “the tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state.” (430 U.S. 279.)

Out-of-State District (JF)

-2-

August 17, 1987
325.0115

We believe that, when an out-of-state business brings or ships property into California for the purpose of making a gift of the property in California, the activity certainly has a substantial nexus with California. We believe that the use tax is fairly apportioned; that is, the tax is apportioned in a manner directly related to the activity taxed, the use of the property in California when the property is given to the donee. All of such taxable use occurs in California. On the other hand, if the state of Georgia considers the gift of the carpet samples as occurring at the time that the samples are withdrawn from inventory and addressed to the donees, such that Georgia imposes its use tax, California provides for a credit for that tax paid to Georgia (Rev. & Tax. Code § 6406). We further believe that California’s use tax in such a case does not discriminate against interstate commerce. California imposes the use tax at the same rate regardless of whether property is purchased out of state for the purpose of making a gift in this state or the property is withdrawn from resale inventory in this state for such purposes. We believe that California’s imposition of the use tax on the use of the carpet samples is fairly related to the services provided by the state. The manufacturer’s employees, with jobs in California, make possible the realization and continuance of valuable contractual relations between the out-of-state manufacturer and the California retailers. (See Standard Pressed Steel Company v. State of Washington Department of Revenue, 419 U.S. 560, 562.) The memoranda you sent which concluded that use tax would be inapplicable to such facts were based upon an approach to the commerce clause which predated the ruling of the Court in Complete Auto Transit, supra. One of the memoranda, dated April 3, 1967 to Headquarters – Audit Review from Tax Counsel Glenn R. Rigby, reasoned that imposing the use tax in such a situation would be similar to imposing sales tax on the sale of property which is sent to a seller’s agent in California for delivery to the purchaser. Such a sale would have been exempt from tax as a sale in interstate commerce. (Ruling 55, subd. (a)(1)(A)3.) The underlying principle remains the same since the date of that opinion. However, if the out-of-state retailer’s agent who makes the delivery in California is an “other place of business” in California of the out-of-state retailer, then the sale occurs in California, and the sales tax would apply. Since the date of Mr. Rigby’s opinion, Ruling 55 has been amended and renumbered as Sales and Use Tax Regulation 1620, Interstate and Foreign Commerce. Subdivision (a)(2)(A) of the regulation no defines “other place of business” to include the homes of resident employees who perform substantial services in relation to the retailer’s functions in this state, particularly in relation to sales. Therefore, if an out-of-state retailer ships property to such a California resident employee of the out-of-state retailer for delivery to the consumer, the sale would occur in California, and sales tax would apply. We believe the regulation supports our similar conclusion that, where an out-of-state retailer ships property to its resident employees in California for delivery to donees in California, then the use of the property by the donor occurs in California, and the use tax is applicable.

Out-of-State District (JF)

-3-

August 17, 1987
325.0115

We hope this answers your question; however, if you need further information, feel free to write again.

RLD:sr