Were filming supplies exempt interstate sales when loaded in California onto a leased production bus bound out of state?

Plain-English summary

A redacted corporate subsidiary rented tax-paid film and lighting equipment, including greyhound-like buses used as mobile studios with technical equipment and self-contained power. It also sold supplies consumed by producer-lessees. An audit for October 1, 1976 through September 30, 1979 led to a September 3, 1980 determination for tax and interest through October 1. The disputed retail-supply sales, disallowed as interstate sales, had a $197,132 tax measure.

At a June 11, 1981 Sepulveda hearing before Robert H. Anderson, the petitioner argued the sales were interstate, prior audits had accepted them, title passed at the outside production site, and the supplies resembled consigned stock not sold until withdrawal and consumption outside California. The petitioner appearance is blank in the source; Van Nuys District Auditor Guy Zimmerman appeared for the Board.

The lessor required a trained driver-technician whenever it leased a bus. The drivers were trained by the lessor but kept off its payroll for labor-union reasons. A lessee could choose from the trained pool, or the lessor designated someone; the lessee paid the driver directly as an independent contractor. When the bus left, the lessor had no control over the driver or equipment.

The producer or a designee estimated needed supplies, which were loaded before departure for outside production sites. Supplies were consumed as needed and accounted for when the equipment returned. The PDF says “petitioner is billed” for everything not accounted for and returned, even though the surrounding narrative and post-hearing argument describe petitioner's billing; the live annotation says the lessee-producer was billed. No accounting or invoice resolves that wording conflict.

The hearing officer found that the supplies were delivered in California. Once loaded, they were in the possession of the lessee through the lessee-paid driver. The lessor was not transporting them with its own facilities or employee, and the leased bus was not a common carrier, so the interstate-shipment exception in Regulation 1620(a)(3)(B) did not apply.

After the hearing, a supplement called audit Item E the only unresolved item and argued there was no sale-and-return because the producer paid nothing before the trip and received one net bill for supplies used rather than a bill for all supplies followed by a refund or credit. The recommendation rejected both consignment and sale-timing theories because the producer bought for consumption, not resale. Transfer of possession for consideration completed a credit sale; physical consumption, accounting, invoicing and payment did not control its time or place.

Prior auditors' failure to recognize California sales gave no legal basis to continue the practice. Anderson recommended redetermination without adjustment, leaving the assessment intact at the recommendation stage. The source supplies no signed audit review or final Board disposition. The live annotation preserves the substantive rule but omits the audit period, amount, hearing, Item E supplement, prior-audit contention, recommendation-only posture and source wording conflict.

Common questions

Why did possession pass in California?

The supplies were loaded onto a leased bus under a driver paid and controlled by the lessee, making the driver the lessee's representative rather than the lessor's employee.

Was the bus a qualifying common carrier?

No. The recommendation said it was under lease to the producer and was not a common carrier.

Why did the consignment analogy fail?

The producer bought the supplies for its own consumption, not for resale from consigned inventory.

Did later counting, billing or payment move the sale outside California?

No. The officer treated the earlier California possession transfer as completing a taxable credit sale.

Did prior audits protect the treatment?

No. The recommendation said earlier auditors' failure to recognize the California sales was not a legal basis to continue the practice.

Was the $197,132 measure finally upheld by the Board?

The hearing officer recommended no adjustment, but the PDF supplies no final Board action or later outcome.

Citations and references

• Revenue and Taxation Code sections 6006 and 6006(c)(2) — sale and returned-property provisions cited in the decision and petitioner's supplement
• Regulation 1620(a)(3)(A) and (B) — California delivery and outside-shipment rules quoted
• Audit determination, protest, Item E supplement, transcript and exhibits — described or partly quoted but absent
• July 14 Decision and Recommendation — no-adjustment recommendation; final Board action not supplied
• Official Annotation 325.0614 — publishes the substantive rule while omitting the amount, proceeding and source conflict

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0614
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0614.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination of State
and Local Sales Tax

Petitioner

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325.0614
7/14/81

DECISION AND RECOMMENDATION

The above-entitled matter came on regularly for hearing on Thursday, June 11, 1981, in Sepulveda, California, before Robert H. Anderson, Hearing Officer.

Appearing for Petitioner:

Appearing for the Board:

Guy Zimmerman, Auditor
Van Nuys District

Protest
Petitioner was audited for the period from October 1, 1976, through September 30, 1979, and a determination for tax and interest to October 1, 1980, was issued on September 3, 1980. Petitioner protests the assessment for sales tax on retail sales of supplies, disallowed as interstate sales. Tax measure: $197,132. Contentions The disallowed interstate sales were, in fact, interstate sales. The firm has been audited in the past, and in c2ch prior audit it was found that these transactions were exempt. Title to the merchandise does not pass until the merchandise reaches the out-of-state production site. The transaction is similar to goods placed on consignment, and no sale occurs until the goods are withdrawn from the consigned inventory, which is, in this case, always at some out-of-state film production location. Summary
--- is a corporation and subsidiary of --- The firm is engaged in business of renting tax-paid film and lighting equipment, including vans or busses to house as well as transport the equipment to film production locations. The firm also sells filming supplies, which are purchased and consumed by the lessee producers who lease the equipment.

The equipment that houses and transports the filming and lighting equipment consists of greyhound-like busses described as mobile filming studios which contain technical equipment, including a self-contained power source. Petitioner always requires a trained driver-technician to operate the equipment every time a unit is leased. There is a pool of specially trained drivers who are described as technicians and jacks of all trades. They are trained by petitioner, but are not on petitioner's payroll for labor union reasons. A lessee must have a driver from the pool, and may select anyone he wishes. If the lessee has no choice, petitioner designates a driver. The drivers are equipment trouble shooters or maintenance men; they are not cameramen, and do not film scenes on film or video tape for the lesseeproducers who rent the equipment. The drivers are paid directly by the lessee of the equipment as independent contractors. Thus, when a bus loaded with equipment leaves petitioner's premises, petitioner has no control over the driver or the equipment. Custody of everything on the bus is in the driver until the bus reaches· its destination, which, in the matter at hand, is always at some out-of-state point. This controversy arises because of the filming supplies that petitioner sells to lessees of the equipment. Supplies needed are estimated by the lessee-producer or someone he designates. They are placed on board the bus before it leaves petitioner's place of business, and are transported to the location where filming is to be done. In this controversy, the locations were all outside of California. Supplies are used, as needed, during the filming operations, and when the equipment is returned to petitioner, an accounting for the supplies is made and petitioner is billed for everything not accounted for and returned. Petitioner contends that there is no sale until the supplies are withdrawn from the bus and consumed, and that this is always outside the State of California so no sales tax is applicable. The auditor relies on Regulation 1620 and more specifically subsection (a) (3) (A) of the Regulation as authority for concluding that the sale occurs in California. The subsection reads, in part, as follows: (3) Sales Preceding Movement of Goods From Within State to Points Outside State. (A) To Other States - When Sales Tax Applies. Except as otherwise provided in (B) below, sales tax applies when the property is delivered to the purchaser or his representative in this state, whether or not the disclosed or undisclosed intention of the purchaser is to transport the property to a point outside this state, and whether or not the property is actually so transported. Following the hearing, --- wrote the following supplement to arguments for an exemption as an out-of-state sale. Item E of the audit "In state deliveries of supplies reported as exempt interstate sales" is the only remaining unresolved item. In your closing comments, you

stated you may consider the items sales and return of sales thereby concluding the transactions to be taxable. We were likening the situation to goods in consignment or a mobile retail store. The sale taking place at the production site at the time the supply is removed from the --- and used or consumed by the producer. Since we did not include this discussion in our original protest, I concluded a follow up letter would be in order. As you know, a sale means "Any transfer of title or possession... of tangible personal property for a consideration" (6006). Also, sales price does not include... the amount charged for property returned by customers when that entire, amount is refunded either in cash or credit (6006 (c) (2)) It seems to me we do not have a sale and return for two reasons. One, the producer pays no consideration for the supplies furnished prior to going out to a production site. Two, the form and substance of the transaction is a single billing for any supplies used on site. We compare the supplies furnished to those not used. The difference constitutes supplies used. We do not bill for all the supplies furnished and issue a refund or credit for the supplies not used. Therefore, both the form and the substance of the transaction constitute a sale outside the state. Conclusions Subsection (a) (3) (B) of Regulation 1620 provides, in part: (B) Shipments Outside the State - When Sales Tax Does Not Apply. Sales tax does not apply when the property pursuant to the contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer, by means of:

1. Facilities operated by the retailer, or
2. Delivery by the retailer to a carrier, customs broker or forwarding agent,
   whether hired by the purchaser or not, for shipment to such out-of-state point. None of the foregoing events occurred in respect to the supplies. First, the bus was under lease to the lessee-producer, and the driver was being paid by the lessee-producer, so petitioner was not using his facilities or his employee to transport the property out-of-state. Second, the bus was not a common carrier. On the other hand, the subsection relied on by the auditor is applicable. "Sales tax applies when the property is delivered to the purchaser or his representative in this state, whether or not the disclosed or undisclosed intention of the purchaser is to transport the property to a point outside this state, and whether or not the property is actually so transported." As --- noted in his letter, quoted above, "Sale" means any transfer of title or possession ... of tangible personal property for a consideration (6006).

Clearly, possession was transferred, in California, when the supplies were placed on the bus which was under the control of a driver being paid by the lessee of the bus. The occurrence of a sale is not dependent on when or where the property is consumed physically, when it is invoiced, or when payment is made for the property. The consignment argument or analogy falls short because the sale of the supplies was not a sale for resale to the lessee-producer; it was a retail sale to the lessee-producer who intended to physically consume the supplies sometime and at some place. As noted, physical consumption does not complete the sale; the transfer of title or possession (in lieu of title) is the element necessary to complete the sale. Credit sales are taxable when the sale is made, not when payment is finally made. The fact that auditors who made prior audits of petitioner's business failed to recognize these transactions as sales in California is not a basis in law on which to recommend that the practice be continued. In summary, it is concluded that the sale of the supplies occurred when possession of them transferred from petitioner to the lessee through the driver of the bus who was not an agent or employee of petitioner, and this occurred in California, which precludes finding that the sales were in interstate commerce or were out-of-state transactions. Recommendation Redetermine without adjustment.

July 14, 1981
Robert H. Anderson, Hearing Officer

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REVIEWED FOR AUDIT:

Principal Tax Auditor

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