Were imported transformers exempt from California use tax when installed on refrigerated containers moving in foreign commerce?

Plain-English summary

The live annotation says a California corporation purchased refrigerated containers in Japan. The supporting petition memorandum instead says the taxpayer constructed 100 forty-foot refrigerated containers there. They arrived in San Francisco carrying dry cargo as instruments of international traffic.

The protested measure was $78,568 for 92 individual transformers bought from a Belgium-based firm. The memo says they were manufactured in Belgium but later says they were imported from Germany; it does not explain that difference or why only 92 transformers were protested for 100 containers. The transformers entered a foreign trade zone under Customs custody, were delivered to a redacted pier under Customs supervision, installed on the containers, and then used with foreign cargo moving abroad.

The hearing officer concluded that import immunity ended when the transformers were removed for installation. Affixing them to the containers was a local California activity, and the containers were functionally used in California as part of a revenue-producing foreign-commerce operation before departure.

Section 6009.1 did not create a blanket exemption for property installed in California on an instrumentality of foreign commerce. Its exclusion required subsequent functional use solely outside California; these transformers were installed and used here first. The recommendation therefore left the use-tax assessment unchanged.

The taxpayer relied on the Import-Export Clause, argued that federal customs rules precluded domestic commerce, and invoked section 6009.1. It nevertheless conceded that the containers were functionally used in California in foreign commerce. Counsel's July 2 fact memorandum, Customs materials, contracts, invoices, installation records, leases and cargo records are not reproduced.

The hearing date appears only as November 25, 19XX, and the audit period is redacted. The hearing officer signed December 17, continuation headers say December 19, and a principal auditor reviewed the recommendation December 23. No final Board action, adjusted amount, payment, claim, appeal, or later outcome is supplied.

Common questions

Why did import immunity end?

The recommendation said the transformers ceased to be imports when removed for attachment to the containers; installation at the California pier was a local activity.

Did Customs custody and foreign-trade-zone handling preserve the exemption?

Not through the California installation and use described here. The decision focused on commitment to the imported purpose and local attachment, despite Customs supervision.

Why did section 6009.1 not apply?

The recommendation required subsequent functional use solely outside California. It found the transformers were installed and used in a revenue-producing operation here before departure.

Were all 100 containers matched with protested transformers?

The source does not say. It describes 100 containers but a protested purchase-price measure covering 92 transformers.

Did the transformers come from Belgium or Germany?

The source does not resolve it. It says the seller was Belgium-based and the transformers were manufactured in Belgium, then says they were imported from Germany.

Did the Board finally adopt the recommendation?

No final action is included. The source only recommends redetermination without adjustment and records a later audit review.

Citations and references

• U.S. Constitution article I, section 10 Import-Export Clause — invoked for import immunity; complete text, doctrine, later case law, and current law not supplied
• California Revenue and Taxation Code section 6009.1 — cited for installed property later transported for sole outside use; complete statute, proof, amendments, later history, and current law not supplied
• Brown v. Maryland and Youngstown Sheet & Tube v. Bowers — cited for import status and commitment to imported use; complete opinions, comparison facts, later treatment, and current law not supplied
• Southern Pacific v. Gallagher and American Airlines v. State Board of Equalization — cited for local activity and sole-outside functional use; complete opinions, comparison facts, later treatment, and current law not supplied
• July 2 taxpayer memorandum and transaction records — not reproduced or absent; counts, origin, Customs, installation, lease, cargo and tax facts remain incomplete
• December recommendation — leaves $78,568 unchanged but supplies no final Board action or later outcome
• Official Annotation 325.0236 — adds California-corporation and purchase facts that differ from the supporting memo's construction description and omits the measure, count and origin conflicts, provenance, missing records, dates, posture, 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/325-0236.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
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In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law
S--- C---, INC
Petitioner

325.0236

DECISION AND RECOMMENDATION
OF HEARING OFFICER
Account No. SN -- XX XXXXXX

This matter came on regularly for hearing in ---, California, on November 25, 19XX, before W. E. Burkett, Hearing officer. Appearances: For the Taxpayer:

Mr. K. B--- F--Attorney at Law
Mr. V--- B--Regional Manager

For the Board:

Mr. Robert L. Matlean
Audit Supervisor
Protested Item
(Period 10-1-XX to 12-31-XX)

Purchase price of personal property
subject to use tax.

$78,568
Contentions of Taxpayer

1.
The property is constitutionally exempt as an import under the export-import clause of the federal constitution. 2. The purchase is entitled to the use tax exclusion provided by Revenue and Taxation Code section 6009.1. Summary of Petition The taxpayer is engaged in the leasing of cargo containers for use in foreign commerce. The protested measure of tax consists of the purchase price of 92 individual transformers purchased from a Belgium based firm and installed on cargo containers in San Francisco. The circumstances underlying the acquisition and installation of the containers is set forth in a memorandum submitted by the taxpayer’s attorney dated July 2, 1975. It provides as follows:

S--- C---, Inc.
SN -- XX XXXXXX

“I.

-2-

December 19, 1975
325.0236

FACTS

“100 forty foot refrigerated containers, equipped with refrigeration units, were constructed in Japan by S--- C---, Inc. Because of differences in the voltage systems involved in the anticipated use of the containers, it became necessary to equip each unit with a transformer manufactured in Belgium. The containers, without the transformers, were shipped from Japan to San Francisco loaded with dry cargo, moving as instruments of international traffic. On arrival in San Francisco, the containers were unloaded on A--- P--- L--- Pier XX; the transformers were then imported from Germany, traveling under S--- C---’s instruments of international traffic, and were placed in the custody of the U. S. Customs in the foreign trade zone. Thereafter, under supervision of the U. S. Customs, the transformers were delivered to APL Pier XX and installed in the containers. The containers were then loaded with a foreign cargo, loaded on ships of A--- P--- L---, lessee of the containers, and proceeded to a foreign destination under A--- P--- L---’ instrument of international traffic.” The subsequent use of the containers was wholly in foreign commerce. The taxpayer’s contention that the goods constitute exempt exports is premised primarily upon the argument that the federal customs regulations precluded use of the property in domestic commerce. It is also contended that the property literally comes with the exclusion provided by Revenue and Taxation Code section 6009.1. However, it is conceded that the containers were functionally used in California in foreign commerce. Analysis and Conclusions It is our conclusion that the use tax applies to the purchase of the transformers. The constitutional exemption for goods shipped into this country is limited to imports (Brown v. Maryland, 25 U. S. 441). The constitutional exemption ceases to be applicable when the goods are committed to the use for which they were imported (Youngstown Sheet & Tube v. Bowers, 358 U. S. 534.) In this petitioned matter, the property imported, the transformers, ceased to be imports at the time they were removed from the shipping containers for affixation to the containers. This was a purely local activity to which the use tax is applicable (Southern Pacific v. Gallagher, 306 U. S. 167; American Airlines v. State Board of Equalization, 216 Cal.App.2d 180). The exclusion from use tax provided by Revenue and Taxation Code section 6009.1 for property affixed to other property is limited to property transported outside this state for use solely outside this state. The exclusion is not applicable here for the reason that the property was used here in a revenue producing operation prior to the time it left the state. This provision was not intended to provide an exclusion on the basis that the property was thereafter used here in a manner that would qualify for the exemption, since it is not this use to which the exclusion is being applied.

S--- C---, Inc.
SN -- XX XXXXXX

-3-

December 19, 1975
325.0236

In order to qualify for exclusion, the subsequent functional use of the property must be solely outside California (see discussion in American Airlines v. State Board of Equalization, supra). Stated another way, the use tax exclusion does not provide a blanket exemption for property installed in this state for use on instrumentalities of foreign commerce. Since the property was installed in this state and not entitled to the exclusion provided by section 6009.1, the use tax is applicable. Recommendation It is recommended that the taxes be redetermined without adjustment.

__________
W. E. Burkett, Hearing Officer

12-17-75
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Date

Reviewed for Audit:

Principal Tax Auditor

12-23-75
Date