Was use tax due when advertising invoices shipped directly out of state were never used there and later returned to California?

Plain-English summary

A California printer shipped advertising-bearing sales invoices directly to out-of-state retailers, which received them free and were paid to use them. Because the company and its agents did not take possession before shipment, the printer's sale was an exempt interstate shipment regardless of whether the transfer was described as a gift or loan.

Unused, expired invoices had to be returned to the company in California. The letter assumed the company would then track, recycle, destroy, modify, reissue, or otherwise handle them for a purpose suitable to outdated invoices. That was their first functional use, so use tax applied to the sales price of the returned invoices.

The 90-day rule did not help even when return occurred after 90 days because those particular invoices had never been functionally used outside California. The company also always intended unused invoices to be returned, so the source found no later change in intent or circumstances.

The recipients were paid to use the invoices, and the request said the documents did not qualify as printed sales messages under Regulation 1541.5. Counsel found the gift-versus-loan label unnecessary to the direct-shipment result, while collecting several older BTLG annotations that explained those categories.

The interstate conclusion depended on an express assumption: the printer shipped by common carrier directly to the outside-state establishments, and neither the company nor its agents first took physical possession. Counsel warned that a different possession fact might change the opinion.

The California functional use was also assumed rather than documented. The letter lists tracking, recycling, destruction, modification and reissuance as examples of purposes suitable for outdated invoices, but supplies no actual returned invoice or handling record.

No request, agreement, invoice form, advertisement, quantity, recipient fee, shipment, possession record, outside usage, return, California handling, sales price, tax calculation, audit, assessment, payment, claim, appeal, or later outcome is supplied. The live annotation adds “M99–2” without the amendment text.

Common questions

Why was the printer's original sale exempt?

Counsel assumed direct common-carrier shipment from the California printer to outside-state recipients without prior possession by the company or its agents. Under section 6396 and Regulation 1620(a)(3)(B), that was an interstate shipment.

Did it matter whether the company gave or loaned the invoices?

Not for that shipment conclusion. The opinion treated direct delivery and possession as controlling, although it separately summarized older gift-and-loan annotations.

What was the returned invoices' first functional use?

On the assumed facts, California handling such as tracking, recycling, destruction, modification or reissuance for a purpose suitable to expired invoices. No actual handling record is supplied.

Why did waiting 90 days not help?

The 90-day rule required first functional use outside California. The unused returned invoices had never served as sales invoices outside the state.

Did the return show a later change in intent?

No under the request. Recipients were always required to return unused invoices, so counsel found no changed intent or circumstance.

Could the unidentified client rely on the letter under section 6596?

No. Counsel expressly said anonymity and possibly incomplete facts prevented the requested written-advice treatment.

Citations and references

• California Revenue and Taxation Code section 6596 — cited for reliance treatment expressly unavailable to the unidentified client; complete authority, conditions, procedure, amendments, later history, and current law not supplied
• Sections 6051, 6201, 6401, 6202 and 6203, Civil Code section 1656.1, and Regulation 1700(a) — cited for sales tax, use tax, liability, collection and reimbursement; complete authorities, measures, contracts, procedures, amendments, later history, and current law not supplied
• Sections 6011 and 6012 — cited for gross receipts and sales price; complete authorities, allocations, exclusions, amendments, later history, and current law not supplied
• Section 6396 and Regulation 1620(a)(3)(B) and (b)(3) — cited for direct shipment, functional use, and timing tests; complete authorities, possession and counting rules, amendments, later history, and current law not supplied
• Regulation 1541.5 and BTLG Annotations 280.0620, 280.0040, 280.0640, 570.0180, 570.0200 and 280.0670 — cited for printed messages, gifts and loans; complete authorities, underlying opinions, amendments, later history, and current status not supplied
• December 15 request and February 23 response — no actual program, invoice, shipment, use, return, tax, audit, assessment, claim, appeal, or later-outcome records supplied
• Official Annotation 325.0180's historical summary, date and M99–2 marker — supplies no amendment text and omits the reliance refusal, assumptions, older authorities, missing records, applied outcome, and reliance status

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 325.0180
• Original supporting opinion: 325.0180 PDF

Original ruling text

325.0180

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 324-2637
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
___

February 23, 1998

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
___
E. L. SORENSEN, JR.
Executive Director

Mr. -. S--- N----- --- --- LLP
XXXXX --- Street, Suite XXXX
--- ---, California XXXXX
Re: Unidentified Taxpayer
Dear Mr. N---:
This is in response to your December 15, 19XX letter regarding the application of tax to your unidentified client’s (hereafter “the Company”) operations. You request a “ruling” pursuant to Revenue and Taxation Code section 65961 which you acknowledge is not binding on this Agency. I initially note that only the elected members of the Board may issue a ruling with respect to matters properly before them, and that staff can only issue an opinion as to how tax may or may not apply to a particular set of facts. You also acknowledge that our opinion is not binding since you did not identify the taxpayer (and possibly all relevant facts), but nevertheless request that our “ruling” be made pursuant to section 6596. This is perplexing. An opinion from this Agency is made pursuant to section 6596 only when all the conditions of that section are all satisfied, including the disclosure of the parties and all relevant facts. This opinion is not pursuant to section 6596 since you did not identify the taxpayer (and possibly all relevant facts). As a practical matter, an unidentified taxpayer (or its representative) cannot obtain a “non-binding” letter “pursuant to California Revenue and Taxation Code . . . [section] 6596” as you request. With this in mind, you provide the following facts: “The Company provides sales invoices (that contain various advertisements on the bottom) free of charge to certain retail establishments -- and pays the recipients a fee to ensure usage of the invoices to further promote the advertisements contained therein. The sales invoices are shipped from California by the printer to recipients located outside California. 1

All further references are to the Revenue and Taxation Code unless otherwise specified.

Mr. -. S--- N---

-2-

February 23, 1998
325.0180

“The invoices must be used during a specific period,
because the advertisements are valid for a limited time
period and contain an expiration date. The recipients are
required to return all unused invoices, since they are not
suitable for their intended use. The Company sends the
recipients a quantity of invoices that it believes the recipients will fully consume during the periods of intended use. It is not the intent of the Company to send excess invoices for the purpose of storing and subsequently returning the invoices to the Company. The sales invoices do not qualify as printed sales messages pursuant to Regulation 1541.5.” I understand you to ask whether tax applies with respect to the Company’s transfer of its invoices to the out-of-state retail establishments and whether tax applies when any unused invoices are subsequently returned to California. You also ask whether the Company is making a gift or a loan of the invoices to the out-of-state establishments. Discussion California imposes a sales tax on a retailer’s gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (§ 6051.)2 When sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use or other consumption of that property in California. (§§ 6201, 6401.)3 Taxable gross receipts or sales price generally include all amounts received with respect to the sale, with no deduction for the cost of materials, service, or expense of the retailer passed on to the purchaser, unless there is a specific statutory exclusion. (§§ 6011, 6012.) You place much relevance in your efforts to characterize the transfer of the Company’s invoices as a loan and not a gift. I do not believe this distinction is necessary.4 You state that the Company pays certain retail establishments located outside California to use its invoices. You further state that these invoices are shipped from California by the printer to the out-of-state 2

This tax is imposed on the retailer who may collect reimbursement from its customer if the contract of sale so provides. (Civ. Code § 1656.1; Reg. 1700(a).) 3 This tax is imposed on the person actually storing, using, or otherwise consuming the property. (§ 6202.) A retailer engaged in business inside this state is required to collect this tax from its customers and remit it to this Board. (§§ 6202, 6203.) 4 Though not relevant, the application of tax to gifts and loans of property is dependent on several factors. Where a gift is purchased and the purchaser directs the vendor to ship it to an out-of-state donee, the sale occurs in interstate commerce and is not subject to tax. (BTLG Annot. 280.0620 (12/6/61); Reg. 1620(a)(3)(B).) Conversely, a donor is liable for use tax when he or she makes a gift of extax property inside this state. (See BTLG Annots. 280.0040 (10/11/63), 280.0640 (3/15/60).) The loan of tangible personal property for use inside this state is a taxable use of that property. (See BTLG Annot. 570.0180 (3/8/68).) The loan of tangible personal property delivered outside this state for use solely outside this state is not a taxable use of the property by the lendor. (BTLG Annot. 570.0200 (2/2/65).) The difference between a gift and loan of tangible personal property is whether there is an obligation to return the property. (BTLG Annot. 280.0670 (5/14/84).)

Mr. -. S--- N---

-3-

February 23, 1998
325.0180

establishments. I assume from your description that the printer directly ships the invoices to the out-of-state establishments via common carrier and that the Company (or its agents) does not obtain any physical possession of the invoices prior to that shipment. (If my assumption is incorrect, my opinion below might be different.) Under these facts, the printer’s sale of invoices to the Company is an exempt shipment in interstate commerce pursuant to section 6396 and Regulation 1620(a)(3)(B). This sale is not subject to tax regardless of whether the Company is making a gift or loan of the invoices to the out-of-state retailers, or whether the Company pays the out-of-state establishments to use the invoices. You next ask whether tax applies to the unused invoices that are returned to California. Though not directly on point, Regulation 1620(b)(3) explains when property is regarded as purchased for use inside this state: “[P]roperty purchased outside 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 during the six-month period immediately following its entry into the state. Prior out-ofstate 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.” Based on this provision, we regard extax property to be purchased for use inside this state (and subject to use tax) where that property is first functionally used inside California. Property is also regarded as purchased for use inside California where the property is first functionally used outside California and is then brought into this state within 90 days after its purchase, unless the property is used or stored outside California one-half or more of the time during the six month period immediately following its entry into this state.

Mr. -. S--- N---

-4-

February 23, 1998
325.0180

The Company sends invoices to out-of-state retail establishments. Some of the invoices are not used as sales invoices and instead are returned to the Company in California. Regulation 1620 presumes that these invoices are purchased for use inside this state if the first functional use of the property occurs inside California. I assume from your letter that the Company uses these invoices inside this state for any number of purposes such as (for example) tracking the number of unused invoices, recycling, destruction, or modification and reissuance. Under these facts, the use of invoices for any of these purposes (or possibly others) is a functional use since these returned invoices would now be used for a purpose suitable for outdated sales invoices. Tax therefore applies to the sales price of the sales invoices returned to the Company from the out-ofstate establishments. You believe that tax should not apply to the returned invoices where the return takes place at least 90 days after the Company’s delivery to the out-of-state establishment. This is incorrect. The 90 day rule only applies where there is a first functional use of the property outside California. In this case, the returned invoices are never functionally used outside California such that the 90 day rule cannot apply. You also believe that tax should not apply to the returned invoices since the Company intended that they all be used outside the state. This too is incorrect. You state that “the recipients are required to return all unused invoices . . . .” I understand this to mean that the Company always intends that the invoices be returned to California if they are not used as actual sales invoices. Under these facts, there is no change in intent or in circumstances warranting a different result to the application of tax to the returned invoices. The annotations you cite relate to actual changes in intent or circumstances which are simply not evident here. I trust this answers your questions. If you have any further questions, please write again.

Sincerely,

Warren L. Astleford
Senior Tax Counsel
WLA:cl
cc: --- --- District Administrator (--)