Could a manufacturer avoid California sales tax and use-tax collection on customer equipment made out of state, stored here, and later sent to offshore wellsites?

Plain-English summary

An equipment manufacturer made customer-ordered property at its Texas facility, then stored it at the manufacturer's California sales and distribution warehouse until needed at wellsites in federal waters outside California.

California sales tax did not apply if the sales contract passed title to the customer at the out-of-state manufacturing point. A clause inserted unilaterally in the seller's acknowledgment was not enough unless the customer accepted it before California delivery. Bills of lading, insurance, and storage records also had to remain consistent with the customer's ownership.

If a customer rejected the property after it reached the California warehouse, title could revest in the manufacturer. A later cure and California delivery would then pass title here and make the sale taxable.

To avoid collecting use tax, the manufacturer also needed a written certificate signed before or at physical customer delivery, accepted in good faith, stating that the equipment was bought for sole use at named points outside California. The seller had to retain that certificate.

The July 4 request had proposed a seller acknowledgement “notifying” the customer that title passed at manufacture and a purchase order saying the equipment would be used in federal waters. Counsel questioned whether those unilateral or general documents were enough and offered the bilateral title and specific certificate procedures instead.

For a verbal order or written order lacking the title term, the seller could put it in its acknowledgement only if the customer signed and returned a copy before California delivery. Regulation 1620 placed the exemption proof burden on the retailer.

Section 6203 required an engaged retailer to collect use tax at the sale or, if tax did not then apply, when storage, use or consumption became taxable. The certificate relieved the seller's collection duty only when timely, signed, specific, retained, and accepted with a reasonable belief that its facts were correct.

The source supplies no implemented procedure, order, acknowledgement, contract, bill of lading, insurance, warehouse record, rejection or cure, certificate, named offshore point, delivery, actual outside use, price, tax calculation, return, assessment, claim, appeal, or later outcome.

The live annotation cites Regulation 1620(a)(1), while the supporting letter identifies only subdivision (a). It also says the equipment will not be subject to use tax; the letter conditions its conclusions on actual sole outside use and a qualifying certificate for collection relief.

Common questions

Could the seller put the title clause only in its acknowledgement?

Not unilaterally. If the customer's order lacked the clause, the customer had to sign and return the seller's acknowledgement before the property reached California.

What documents had to match customer ownership?

Bills of lading should show the customer as shipper or the seller acting for the customer, and insurance or California-storage documents should not say or imply that the seller retained title.

What happened if the customer rejected equipment in California?

Title could revest in the manufacturer by operation of law. If the seller cured the defect and then delivered to the customer in California, title would pass here and sales tax would apply.

Was a purchase order saying “offshore use” enough for collection relief?

Counsel required more: a written certificate signed by the purchaser or authorized representative before or at physical delivery, naming the outside-state use point or points, accepted in good faith, and retained by the seller.

Did the certificate itself prove no purchaser use tax?

The letter treats actual purchase for sole outside use as the substantive premise and the qualifying certificate as relieving the seller's collection duty. No actual customer use or tax outcome is supplied.

Were these procedures tested in an actual sale?

No. The source reviews proposals and recommends alternatives without an executed contract, certificate, delivery, return, assessment, claim, appeal, or later result.

Citations and references

• California Sales and Use Tax Regulation 1620(a) — quoted for outside-state title and the retailer's proof burden; the live annotation instead identifies (a)(1), and complete authority, conditions, amendments, later history, and current law are not supplied
• California Commercial Code section 2401 — cited for title revesting after customer rejection; complete authority, rejection and cure rules, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6203 — cited for use-tax collection and timing; complete authority, retailer and timing rules, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6009.1 — cited for sole-outside-use treatment; complete authority, every purpose and transport condition, amendments, later history, and current law not supplied
• July 4 proposals and September 3 alternatives — no implemented order, contract, ownership record, rejection, cure, certificate, delivery, use, tax, audit, assessment, claim, appeal, or later outcome supplied
• Official Annotation 325.0168's historical summary and date — adds a subdivision and more categorical use-tax language while omitting the proposal provenance, proof burden, collection timing, 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/325-0168.pdf

Original ruling text

325.0168

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6557

September 3, 1985

Mr. D--- L. B--Supervisor, General Accounting
W--- E--- Division
F--- Corporation
P. O. Box XXXX
---, TX XXXXX

SZ -- XX XXXXXX

Dear Mr. B---:
Your letter of July 4, 1985, to Mr. C. M. H---, has been referred to the undersigned for reply. Your question concerns property which your company manufactures and sells to customers for use on wellsites located in federal waters outside California. We understand that your company has a manufacturing facility in ---, Texas, and a sales/distribution warehouse in California. The property in question will be manufactured to the customer’s order in ---, then shipped to the California warehouse for storage. When needed on the wellsite, either the customer will pick up the property at the warehouse, or your company will deliver it to the wellsite by company facilities or common carrier. You have proposed certain procedures intended to relieve your company from any obligation to: (1) pay California sales tax on these transactions; or (2) collect California use tax from the customers. We have reviewed your proposals and question whether they are sufficient. Accordingly, we propose the following alternative procedures. Sales Tax Subdivision (a) of Sales and Use Tax Regulation 1620 provides in relevant part: “…if title to the property sold passes to the purchaser at a point outside this state, or if for any other reason the sale occurs outside this state, the sales tax does not apply, regardless of the extent of the retailer’s participation in California in relation to the transaction. The retailer has the burden of proving facts establishing his right to exemption.”

Mr. D--- L. B---

-2-

September 3, 1985
325.0168

You propose to include a title clause in your acknowledgement of the customer’s purchase order. The clause will “notify” the customer that title will pass to the customer at the point of manufacture in ---. To be effective, however, the title clause must be part of the sales contract between your company and the customer. A unilateral title clause is not acceptable. Accordingly, we recommend that the title clause be included in the customer’s purchase order and is acknowledged by your company before the property is delivered in California. If the customer submits a verbal order, or a written order which does not include an appropriate title clause, then you may include the title clause in your acknowledgement of the order. In that case, however, you should ensure that the customer accepts the title clause by signing a copy of the acknowledgement, and returning the signed copy to your company, before the property is delivered in California. To prevent controversy, you should also be careful to avoid any actions inconsistent with the prior passage of title to the customer. For example, any time the property is shipped, the bill of lading should show the customer as the shipper, or should at lease indicate that your company is acting as the shipper on behalf of the customer. Similarly, any insurance forms or other documents relating to the storage in California should not state or imply that your company has title in the property. If the sale contract includes a clause under which title to the property passes to the customer outside California, then California sales tax will not apply, with one limited exception. The exception is where the contract is not performed as written. For example, if the property is delivered to the California warehouse, but the customer rejects or otherwise refuses to receive or retain the property, title in the property will revest in your company by operation of law. (See California Commercial Code Section 2401.) If your company then cures the defect and delivers the property to the customer in California, title will pass in this state and the sales tax will apply. Use Tax Collection With certain exceptions not relevant here, Revenue and Taxation Code Section 6203 imposes a duty to collect California use tax on “every retailer engaged in business in this state and making sales of tangible personal property for storage, use, or other consumption in this state….” The tax is to be collected at the time of making the sale, or if tax does not then apply, “at the time the storage, use, or other consumption becomes taxable….” It is your position that the sales in question are not for storage, use, or other consumption in this state. You rely on Revenue and Taxation Code Section 6009.1, which provides that the terms “storage” and “use” do not include “the keeping, retaining or exercising any right or power over tangible personal property for the purpose of subsequently transporting it outside this state for use thereafter solely outside this state….” Therefore, instead of collecting tax, you propose to obtain a purchase order from the buyer stating the purchased equipment is to be used in federal waters offshore California.

Mr. D--- L. B---

-3-

September 3, 1985
325.0168

Under the circumstances of this case, we agree that an appropriate certificate will relieve your company of the duty to collect use tax. The certificate must be in writing and must be signed by the purchaser or his authorized representative before or at the time of physical delivery to the customer. It must state that the property is purchased for use solely outside California at a named point or points outside this state. You must accept this statement in good faith (i.e., with reasonable belief that the facts stated therein are correct) and must retain a copy in your files. To sum up, you company will not be required to pay California sales taxes on these transactions if title to the property passes to the purchaser outside this state. Your company also will not be required to collect California use tax, if you receive in good faith, and retain, an appropriate certificate from the purchaser as described above. Please feel free to call or write the undersigned if you have any further questions or comments. Very truly yours,

James E. Mahler
Tax Counsel

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