Did section 6009.1 exempt imported parts bought through a California sales office and incorporated here into equipment used out of state?

Plain-English summary

A redacted corporation's December 20, 1995 district-office letter described imported component parts bought through a foreign manufacturer's California sales office. That office accepted orders, arranged foreign-plant delivery and handled customs; the foreign manufacturer bore shipping risk, title passed at the California office, and the price included delivery and customs fees. The office held no parts inventory and drop-shipped them to a California manufacturer, which incorporated them into equipment sent to the buyer's outside locations for sole outside use without return to California. The buyer said direct purchasing protected sensitive competitive information.

Counsel questioned the request's statement that the buyer furnished its own parts to the California manufacturer “at no cost”: on the stated structure, the manufacturer was not buying the parts and would instead charge the buyer for incorporating them. No order, contract, invoice, customs record, shipment, equipment or use evidence is included.

Because the sale occurred in California, sales tax applied. Section 6009.1 excluded qualifying storage or use from use tax; it did not exempt an in-state retail sale.

If title instead passed outside California, use tax became the relevant tax. Incorporating the parts in California into equipment transported outside the state and used solely there could qualify for section 6009.1, provided the buyer made no other California use. The same answer applied when the buyer paid shipment and handled customs, ordered directly from the foreign manufacturer with no California location participating, or ordered through an outside sales office with outside title passage.

By contrast, contract-required delivery outside California followed by return of the parts to a California plant did not qualify for section 6009.1. The same was true when the California office shipped to the buyer outside California and the buyer sent the parts back to the California manufacturer.

The letter also addressed proposed nominal, at-cost and cost-plus-profit resales to the California manufacturer. A nominal transfer that was not a bona fide business transaction would leave the buyer as consumer. A true resale could defer tax to the manufacturer's retail sale unless otherwise exempt. On the specific assumptions that the parts price would be added to the completed-equipment charge and effectively paid back, counsel would treat a resale price including all of the buyer's costs as bona fide.

No alternative is documented as an actual transaction. The source provides no prices, taxable measure, return, collection, audit, payment, claim, appeal or later outcome.

The live annotation preserves only the California-title sales-tax result and the outside-title section 6009.1 alternative. It omits the other ordering and customs variants, California return, resale analysis, evidence gaps and procedural posture.

Common questions

Why did section 6009.1 not protect the original structure?

Title passed through the California sales office, making the transaction an in-state sale subject to sales tax. Section 6009.1 addressed qualifying storage or use, not that sale.

What changed if title passed outside California?

Sales tax no longer applied on the stated facts; any applicable tax was use tax, so California incorporation solely for outside transport and use could fall within section 6009.1.

Did paying freight and handling customs change that answer?

No. Counsel gave the same answer when outside title passage remained and the buyer separately paid shipment and handled customs.

What if a California location did not participate in the order?

Direct ordering from the foreign manufacturer received the same outside-title answer, provided no California location of that foreign manufacturer participated in the sale in any way.

Could the parts be routed outside California and then returned here?

The outside shipment could prevent sales tax when the contract required it, but returning the parts for California use defeated the section 6009.1 use-tax exclusion.

Did a nominal resale automatically create resale treatment?

No. A nominal transfer lacking a bona fide business purpose left the buyer treated as the consumer.

What resale did counsel accept on the stated assumptions?

A sale price including all of the buyer's costs, where that amount would be added to the manufacturer's completed-equipment charge and effectively paid back, was treated as bona fide for these facts.

Citations and references

• California Revenue and Taxation Code sections 6051, 6007, 6201, 6401, 6202, 6203, 6204 and 6009.1 — cited for sales, resale, use tax, collection and outside-use exclusion; complete historical and current authorities not supplied
• California Civil Code section 1656.1 — cited for contractual sales-tax reimbursement; complete contract and current authority not supplied
• Regulation 1620 — cited for California and outside sales, use tax and contract-required outside shipment; complete title and shipping evidence not supplied
• BTLG Annotations 295.0660, 295.0680 and 295.0700 — cited for nominal, non-bona-fide transfers; underlying opinions and later treatment not supplied
• December 20 request and transaction records — only part of the request is reproduced; parties, parts, contracts, title, risk, customs, shipping, manufacture, use, resale and tax records remain absent
• June 19 response — alternatives and assumptions only, with no transaction-specific tax proceeding or later result
• Official Annotation 325.0425 — preserves the core title and section 6009.1 distinction but omits most variants, resale analysis, evidence gaps and posture

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 325.0425
• Original supporting opinion: 325.0425 PDF

Original ruling text

325.0425

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 322-2976
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

June 19, 1996

KATHLEEN CONNELL
Controller, Sacramento
___
E. L. SORENSEN, JR.
Executive Director

Mr. M--- M---, Tax Manager
I--- Corporation
XXXX --- --- Boulevard, --X-XXX
--- ---, CA XXXXX

Re:

I--- Corporation
SY -- XX-XXXXXX

Dear Mr. M---:
Your letter to our --- --- District Office, dated December 20, 1995, has been referred to the Legal Division for response. You state: “I--- purchases component parts from a foreign manufacturer’s sales office in California. The California sales office accepts the order, arranges for delivery from the foreign plant and handles processing through customs. The foreign manufacturer is responsible for risk of loss during shipment and title passes at the sales office in California. I---’s purchase price includes delivery charges & custom fees. The California sales office does not maintain an inventory of I---’s component parts. At I---’s direction, the California sales office drop ships these component parts to a manufacturer in California. I--- furnishes these component parts at no cost to the California manufacturer. The California manufacturer incorporates these component parts into equipment. The California manufacturer then ships the equipment to I--- locations outside of California, for use outside of California. The equipment does not return to California. These component parts are purchased directly by I---, vs. purchased by the California manufacturer, for a variety of reasons, including the protection of competitive, sensitive information associated with the component parts.” It is unclear why you state that I--- furnishes the component parts “at no cost” to the California manufacturer. It appears from the facts you have provided that I---, rather than the manufacturer, purchases the parts. As long as the manufacturer is not purchasing the parts, you

Mr. M--- M---

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June 19, 1996
325.0425

would have no reason to charge the manufacturer; rather, it appears that the manufacturer would instead charge you for incorporating the parts into the equipment. You ask a number of questions concerning the scenario above. First, you ask: “1. Because these component parts are incorporated into manufactured products which are shipped to locations outside of California, are these component parts exempt from California tax under section 6009.1 of the California Sales & Use Tax Law?” In answering your questions, it is best for me to begin with a general discussion of California Sales and Use Tax Law. Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) A retailer may collect reimbursement from the purchaser for its sales tax liability if the contract of sale provides for such reimbursement. (Civ. Code § 1656.1.) When sales tax does not apply, such as when sales take place outside of California, the use tax, measured by the sales price of the property sold, applies to the use of property purchased from a retailer for storage, use, or other consumption in California unless the use is specifically exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401, Reg. 1620.) Although the purchaser is liable for the use tax, a retailer engaged in business in this state is required to collect the use tax from the purchaser and to pay that tax to this state. (Rev. & Tax. Code §§ 6202, 6203, 6204.) Under these facts, where the sale of the property is made through the foreign manufacturer’s California sales office and title passes (and thus the sale occurs) in California, the sales tax, rather than the use tax, applies. (Reg. 1620(a)(2)(A).) The storage and use exclusion provided in Revenue and Taxation Code section 6009.1 is an exclusion from the use tax, but not from the sales tax. Thus, under the facts you have provided, the sales of the component parts are not excluded from tax under section 6009.1. Rather, the foreign manufacturer’s sale to you in this state is subject to sales tax. “2. Are these parts exempt under other California statutes or regulations?” Based on the facts as you have described them above, the sales of the component parts are not exempt from tax under any California statutes or regulations.

Mr. M--- M---

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June 19, 1996
325.0425

“3.
If taxable based on the current facts, what is the Board’s tax position under the following circumstances: “A. The component parts are ordered from the California sales office, but title passes at the foreign location?” If title to the property passes to the purchaser outside of California, the sales tax would not apply; rather, the use tax would be the applicable tax. (Reg. 1620(a)(1), (b)(1).) You have asked about the section 6009.1 exclusion from use tax, which provides: “‘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 the state for use thereafter solely outside the state, or for the purpose of being processed, fabricated, or manufactured into, attached to or incorporated into, other tangible personal property to be transported outside the state and thereafter used solely outside the state.” You indicate that after the parts you purchase are incorporated into the equipment, the equipment is shipped to your out-of-state locations for your use outside of California, and that the equipment does not return to California. If such is the case, your storage or use of the parts in California for the purpose of incorporating them into equipment that will be transported outside this state for use solely outside this state comes within the section 6009.1 exclusion, and you will not owe California tax on such storage or use. However, you will owe use tax if you make any use of the property in California other than the storage or other exercise of a right or power over the property for the purpose of shipment outside this state for use thereafter solely outside this state. “B. The component parts are ordered from the California sales office, title passes at the foreign location, I--- separately pays for shipment and I--handles processing through customs?” The answer to this question is the same as the answer to question 3A. “C. The component parts are ordered directly from the foreign manufacturer, with no participation by their California sales office?” The answer to this question is the same as the answer to question 3A, provided no location of the manufacturer in California participates in the sale in any way. “D. The component parts are ordered from a sales office located outside of California and title passes outside of California?”

Mr. M--- M---

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June 19, 1996
325.0425

The answer to this question is the same as the answer to question 3A. “E. The California sales office drop ships the component parts to the manufacturer’s plant located outside of California and the manufacturer returns the component parts to their California plant?” As long as the contract of sale requires the foreign manufacturer to ship the property to a specific point outside this state, and the property is shipped outside this state, the sales tax will not apply. (Reg. 1620(a)(3)(B).) Instead, the use tax will apply. (Reg. 1620 (b)(1).) You state that the manufacturer will return the parts to California; therefore, the use of the parts will not come within the section 6009.1 exclusion from use tax. “F. The California sales office ships the component parts to an I--location outside of California and I--- ships the parts back to the California manufacturer?” The answer to this question is the same as the answer to question 3E. “G. The California manufacturer purchases the component parts for resale from I---, at a nominal value? “H. The California manufacturer purchases the component parts for resale from I---, at I---’s cost? “I. The California manufacturer purchases the component parts for resale from I---, at I---’s cost plus a profit?” Your purpose for making a sale for resale for a nominal amount is unclear. Where a sale for a nominal amount is found not to be a bona fide business transaction, the person making the sale will be considered the consumer. (See Business Taxes Law Guide Annotations 295.0660(5/21/51); 295.0680 (4/9/51); 295.0700 (6/5/51).) This would mean that the sale to or use by I--- would be subject to tax, as discussed above. On the other hand, if I---’s sales of the parts to the California manufacturer are considered to be true sales for resale, tax will not apply to I---’s sales of the parts, but tax will apply to the retail sale when the California manufacturer sells the parts unless otherwise exempt. Our understanding is that the amount you charge the manufacturer for the parts would be added to the manufacturer’s charge for the completed equipment (i.e., that you would effectively buy back the parts, as part of the completed equipment, for the same price as you charged the manufacturer.) Under the specific facts discussed in this opinion, we would consider sales by I-- in which its sales prices included all of its costs to be bona fide business transactions.

Mr. M--- M---

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June 19, 1996
325.0425

I hope this has answered your questions. If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Tax Counsel
KWC:cl

cc:

Mr. J. W. Cornelius, Supervisor
Audit Evaluation and Planning Section (MIC:40)
--- --- District Administrator
Mr. Robert M. Gilbertson, --- --- District Office