Were exhibit modules exempt interstate sales when their California maker delivered them to the buyer’s California assembler before out-of-state shipment?

Plain-English summary

A redacted buyer's assistant treasurer and tax specialist wrote on December 11, 1990 about charges from a module maker. The buyer contracted with one company to design and construct a trade-show exhibit booth; that company referred the buyer to a second company to manufacture ten exhibit modules. The maker transferred the modules to the booth company in California for assembly, and the booth company later shipped them outside California.

The buyer listed seven invoices, asked which charges were taxable and, if tax remained, asked about paying California directly. The invoices, contracts, modules, prices, tax measures and delivery records are absent. The maker previously had requested its own opinion about California delivery; the buyer attached Tax Counsel Stella Levy's November 15, 1990 response, but that opinion is not reproduced.

Counsel said the interstate exemption failed because the maker delivered the property in California to the booth company on the buyer's behalf. The booth company did not qualify as a forwarding agent because it was not in the business of arranging goods shipments, a definition attributed to absent Annotation 325.1480. The current live annotation additionally says the out-of-state consumer's contract with the module maker did not require interstate shipment and the maker itself shipped nothing outside California; those details do not appear in the supporting PDF.

Making new modules from scratch was a taxable sale. Producing or fabricating modules from raw materials furnished directly or indirectly by the buyer also was taxable under section 6006(b). Modification of a new item was always fabrication under the letter, as was a substantial change fitting property to a new or different use; counsel gave cannibalizing an exhibit to create a different one as an example. Labor merely restoring a used item to original condition was repair, with tax limited to tangible personal property furnished by the repairer under Regulation 1546.

Invoice 9874 involved work described predominantly as services such as drilling holes after the modules had been used at a New York trade show and returned to California. The buyer said property furnished by the maker was not significant. Counsel lacked enough information to decide whether the work was taxable fabrication or repair. If fabrication, the entire charge was taxable; if repair, only furnished property was taxable. Counsel said the other invoices appeared to represent taxable California sales, but the invoice details are absent.

Regulation 1699.5 required a direct-payment permit to serve mutual convenience and then treated receipts below $75 million in any calendar quarter during the preceding 12 months as inconvenient to the Board. Counsel said the buyer's recent returns showed receipts “far below” that threshold and presumed taxable purchases also were below it. The final sentence prints “do on qualify,” an unresolved text defect. The preceding analysis indicates a negative permit conclusion, but the source supplies no correction or later permit decision.

The live annotation preserves the module maker's taxable California delivery and non-forwarding-agent conclusion. It omits the seven invoices, prior opinion, detailed fabrication and repair rules, unresolved invoice 9874, direct-payment request and malformed conclusion, missing records and absent later outcome.

Common questions

Why did later shipment of the assembled exhibit not exempt the modules?

The module maker first delivered them in California to the booth company on the buyer's behalf. Counsel treated that as California delivery, not the maker's outside shipment.

Why was the booth company not a forwarding agent?

The letter said that status covered persons or firms in the business of arranging goods shipments. The booth company designed and assembled the exhibit; the source does not show it had the required shipping business.

Was labor on buyer-furnished material taxable?

Yes when it produced or fabricated tangible personal property. Section 6006(b), as cited, included fabrication using materials furnished directly or indirectly by the consumer.

When could work on a used module be repair labor?

When it merely restored the item to original condition. A substantial change fitting it to a new or different use remained taxable fabrication.

How was invoice 9874 classified?

It was not. Counsel said the drilling work might be fabrication or repair and lacked enough information to decide.

Did the buyer receive a direct-payment permit?

No final permit record is supplied. The letter found receipts far below the historical threshold, but its concluding sentence is malformed as “do on qualify.”

Citations and references

• Revenue and Taxation Code sections 6006(a), 6006(b), 6051 and 6396 — cited for sales, fabrication, California retail tax and outside shipment; complete current authorities and records absent
• Sales and Use Tax Regulations 1546 and 1699.5(b)(4) — cited for repair and the historical direct-payment threshold; stated enclosures and current provisions absent
• Business Taxes Law Guide Annotation 325.1480 and November 15, 1990 Stella Levy response — cited for forwarding-agent status and the same transactions; neither record reproduced
• December 11 request, seven invoices, contracts, tax returns and permit materials — described but absent; transaction measures and supporting evidence unproved
• January 16 response — finds the module sales taxable, leaves invoice 9874 unresolved and contains a malformed permit conclusion; no later correction or outcome supplied
• Official Annotation 325.0495 — adds contract and consumer details while omitting the invoice, fabrication, repair, permit, evidentiary and procedural limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0495
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0495.pdf

Original ruling text

325.0495

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE (916) 445 - 5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR
Third District, San Diego
Matthew K. Fong
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

January 16, 1991

Burton W. Oliver
Executive Director

Mr. [O]
Assistant Treasurer and Tax Specialist
[B]
XXX --- ----- ---, -- XXXXX-XXXX
RE:

S- -- XX-XXXXXX

Dear Mr. [O]:
This is in response to your letter dated December 11, 1990, regarding the application of sales tax to certain charges made by [D]. You contracted with a company named [I] to design and construct a trade show exhibit booth. [I] referred you to [D] to manufacture ten exhibit modules. Those modules were transferred by [D] to [I] in California for assembly. After assembly, [I] shipped the modules outside California. You list seven invoices and ask whether the charges listed in the invoices are subject to tax. If taxable, you ask whether you may pay any remaining sales tax liability directly to California. You also note that [D] had requested an opinion from us as to whether its delivery to [I] in California meant that those sales were subject to sales tax. You have attached a copy of Tax Counsel Stella Levy’s response dated November 15, 1990. A retailer’s retail sale of tangible personal property in California is subject to sales tax unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) A sale in California is exempt from sales tax if the contract of sale requires the property to be shipped outside of California and the property is shipped to a point outside this state by the retailer by means of (a) facilities operated by the retailer, or (b) delivery by the retailer to a carrier, customs broker, or forwarding agent for shipment to such out-of-state point. (Rev. & Tax. Code § 6396.) As stated in Ms. Levy’s opinion to [D], the sales in question do not satisfy the requirements of the exemption since the property was delivered in California to [I] on your behalf. I note that

Mr. [O]

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January 16, 1991
325.0495

[I] does not qualify as a “forwarding agent” since that term includes only such persons or firms that are engaged in the business of arranging for the shipment of goods. (See Business Taxes Law Guide Annotation 325.1480 (1/30/50).) Since the transactions do not qualify for the exemption, all transactions constituting sales of tangible personal property are subject to sales tax. Subdivision (a) of Revenue and Taxation Code section 6006 defines sale as any transfer of title or possession of tangible personal property for a consideration. Subdivision (b) defines sale to also include the producing or fabricating of tangible personal property for a consideration for consumers who furnish either directly or indirectly materials used in that producing or fabricating. Thus, when [D] creates the modules from scratch and transfers them to [B], that transfer is a sale under the California Sales and Use Tax Law. In addition, when [B] or someone on behalf of [B] provides the raw materials to [D] and [D] assembles or fabricates those materials into the final module, that activity is also a sale. The charge for such work would be subject to sales tax. On the other hand, the charge for repair labor is not subject to sales tax as explained in Regulation 1546, a copy of which is enclosed. You describe the work performed under one invoice as predominantly for services such as drilling holes in the modules. You state that this work was performed after the modules had been used in a trade show in New York and then returned to California. Your description also indicates that the furnishing of tangible personal property by [D] was not a significant portion of the invoice. This work may have been fabrication which would constitute a sale and therefore be taxable. The work may instead have constituted repairs with sales tax applying only to charges for tangible personal property furnished by [D] as described in Regulation 1546. Modification performed on a new item is always fabrication constituting a sale under subdivision (b) of section 6006. Modification is also fabrication constituting a sale if that work results in a substantial change to the property so that it is fitted for a new or different use. For example, if an exhibit is cannibalized in order to create a different exhibit, that work is taxable fabrication labor. On the other hand, labor that merely restores a used item to its original condition constitutes repair labor. We have insufficient information to ascertain whether the work performed for invoice 9874 constitutes fabrication or repair labor. If constituting fabrication, [D]’s charge is subject to sales tax. It appears all other invoices represent sales of tangible personal property in California with sale tax applying to those sales. Regulation 1699.5, a copy of which is enclosed, specifies when the Board will issue a direct payment permit. One condition is that the Board determines that issuance of the permit is to the mutual convenience of all parties. Issuance of a direct payment permit is not deemed to be to the convenience of the Board if the applicant has had gross receipts from the sales of tangible personal property of less than $75,000,000 in any calendar quarter during the twelve months preceding the application. (Reg. 1699.5(b)(4).) Your recent tax returns indicate that your gross receipts are far below this threshold. Your taxable purchases are presumably also below the threshold. You therefore do on qualify for a direct payment permit.

Mr. [O]

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If you have further questions, feel free to write again.
Sincerely,

David H. Levine
Senior Tax Counsel
DHL;cs
Enclosure:

Regulations 1546, 1699.5

January 16, 1991
325.0495