Was an aircraft conversion sold directly to Canada exempt when the completed plane was delivered in Burbank and flown to Canada under its own power?

Plain-English summary

After a May 23, 1968 discussion, Headquarters tax counsel reviewed an absent sales-tax redetermination petition for the Out-of-State District Principal Auditor. The supporting PDF says a redacted aircraft firm earlier contracted with the United States to convert seven piston aircraft to prop jets; the live annotation says four. Neither official source resolves the aircraft-count conflict.

The United States sold the converted planes to Canada, and a recent audit had allowed the aircraft firm's first contract as an exempt United States sale. One converted aircraft later caught fire in Canada, but its engine and propellers were salvaged. Canada then contracted directly with the firm to convert another piston aircraft using those parts. The contracts, audit, aircraft, fire and salvage records are absent.

The replacement conversion occurred in Burbank. The completed aircraft was delivered to Canada's agent there, who then flew it to Canada. The live annotation says delivery was to the Canadian government in California but omits the agent and Burbank details.

The auditor treated this later conversion as taxable under Ruling 55(a)(2)(B). The taxpayer argued either that it extended the earlier contract or that Ruling 55(a)(1)(E) exempted it. Counsel rejected the extension because the direct Canada agreement was separately negotiated between different contracting parties. Parties could choose how to structure a transaction, but if they chose a taxable form they bore its consequences even if another form could have been exempt.

Counsel also concluded that the cited export rule for property delivered to a ship, airplane, or other conveyance did not cover removal of the very property sold under its own power. The memorandum therefore recommended denying the firm's petition for redetermination. It reports a recommendation, not final Board action.

The source supplies no petition, tax measure, hearing, final decision or later outcome. The live annotation publishes a taxable result but omits the recent-audit and petition provenance, the count conflict, numbered ruling positions, transaction-choice statement, source defects and recommendation-only posture.

Common questions

How many aircraft were in the first contract?

The linked PDF says seven; the live official annotation says four. The conflict is unresolved.

Why did the earlier United States exemption not control?

The later work arose under a separately negotiated direct contract between the aircraft firm and Canada.

Where did the later delivery occur?

The PDF says the converted plane was delivered to Canada's agent in Burbank before the agent flew it to Canada.

Why did flying to Canada not qualify under the cited export rule?

Counsel said the rule covered property loaded onto a conveyance for foreign transport, not the sold property removing itself under its own power.

Did counsel say an exempt structure was impossible?

No. The memorandum said parties could choose transaction forms, but they had to accept the tax consequences of the form chosen.

Was the petition finally denied?

Counsel recommended denial, but the source supplies no final Board decision or later outcome.

Citations and references

• Sales and Use Tax Ruling 55(a)(1)(E) and (a)(2)(B) — competing historical export and California-delivery rules
• Earlier United States contract, direct Canada contract and recent audit — described but not reproduced
• May 23 discussion and redetermination petition — absent
• Official Annotation 325.0664.150 — conflicts with the PDF on four versus seven original aircraft

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0664.150
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0664-150.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State – District Principal Auditor

From:

Tax Counsel (GLR) - Headquarters

325.0664.150

May 28, 1968

Subject:

Pursuant to our discussion of May 23, 1968, I have reviewed the petition for redetermination submitted on behalf of the [A---] regarding the conversion of seven piston planes. It is our understanding that initially the [A---] contracted with the United States Government to convert seven piston planes to prop jets. The United States Government, in turn, sold the converted planes to the Canadian government. This contract was allowed as an exempt sale to the United States Government in a recent audit. One of the converted planes caught fire in Canada but essential parts, including the engine and props, were salvaged. The Government of Canada then entered into a contract directly with the aircraft firm to convert another piston plane into a prop jet by using the salvaged parts. This conversion took place in Burbank, California. The converted plane was also delivered to the agent of the Canadian Government in Burbank, and they in turn flew the plane to Canada. This conversion was considered to be taxable by the auditor under ruling 55(a)(2)(B). It is the taxpayer’s position that the sale is exempt from tax under one of the following theorie: 1.

The later conversion should be treated as an extension of the intial contract, or

2.

The sale and delivery is exempt under (a)(1)(E) of ruling 55.

Although the first contract calling for the conversion of the seven planes was held to be exempt sales to the United States Government, this has no bearing whatsoever on a separately negotiated contract directly between the [A---] and the Canadian Government.

Out-of-State – District Principal Auditor

-2-

May 28, 1968
325.0664.150

The Parties have their choice in how to handle the transaction. If they choose one that is taxable, they must abide by the tax consequences resulting from this decision, even though they could have chosen one that was exempt. Therefore, it is our opinion that the second contract is not an extension of the first. We do not agree with the taxpayer that the sale is exempt under (a)(1)(E) of the ruling. It is our opinion that the flying of the plane itself is sufficient to subject the plane to the sales tax under (a)(2)(B) of the ruling. You will note that section (a)(1)(E) is concerned with property being sold, boarded and delivered to a ship, airplane, or other conveyance for transportation out of the country. It does not, in our opinion, extend to the removal of the very items sold when that removal is accomplished under the property’s own power. It is for these reasons that it will be our recommendation that the petition for redetermination be denied.

GLR:kc
cc:
Chicago

325.0664.150.doc