Could a buyer receive clothing at its California warehouse tax-free merely because it repackaged and later sent much of it to out-of-state locations?

Plain-English summary

A redacted corporation's tax counsel wrote on June 21, 1994 asking whether vendors could receive an exemption certificate while the corporation took goods during “transit” for repackaging but not California use. Staff said the letter supplied few facts and assumed bulk purchases of children's clothing from California manufacturers, delivery to a California distribution warehouse, separation and repackaging, shipment of a significant portion to outside company locations, and distribution rather than resale. The request and supporting records are absent.

Delivery to the buyer's California warehouse made the vendors' retail sales taxable. Later out-of-state shipment by the buyer did not qualify those earlier sales for the interstate-shipment exemption.

The exemption would have required the purchase contracts to call for the vendors to ship directly to the out-of-state locations without the buyer taking California possession. The letter found no other relevant exemption and said no exemption certificate could support warehouse receipt tax-free under the described facts.

The tax was imposed on each clothing vendor; an invoice amount labeled sales tax was contractual reimbursement collected from the corporation. The corporation recognized other states might credit California tax or reimbursement but worried about tracing qualifying inventory. Counsel said all-California purchases should simplify tracking; mixed purchasing would be harder, but difficulty did not create a California exemption.

Counsel directed the corporation to each state where it would use the property for that state's required credit documents. The letter supplies no tax amount, inventory tracing, other-state law, credit claim or later outcome and does not decide another state's credit.

The stated Regulation 1620 enclosure is absent. The live annotation preserves the warehouse-delivery result but omits the few-facts and assumption posture, vendor-tax/reimbursement distinction, multistate credit issue, destination-state direction and missing records.

Common questions

Did calling the warehouse stop “transit” make receipt exempt?

No. The corporation took possession in California for separation and repackaging.

What direct-shipment arrangement could qualify?

Contracts requiring the vendors to ship straight to the outside locations without buyer possession in California.

Was the invoice's “sales tax” legally imposed on the buyer?

Counsel said the tax was on the vendor; the vendor could contractually collect reimbursement from the corporation.

Did difficulty tracking other-state credits create a California exemption?

No. Counsel treated that as an administrative problem, not a basis to avoid the California vendors' tax.

What did counsel say about other-state credit proof?

Ask each destination state what documentation it required; the letter did not decide those states' laws.

Were the goods bought for resale?

Counsel assumed not, based on the request's statement that the items were not held for resale.

Citations and references

• Revenue and Taxation Code sections 6051 and 6396; Civil Code section 1656.1; Regulation 1620(a)(3)(B) — cited California sale, reimbursement and shipment rules
• June 21 request and transaction records — few facts supplied; assumptions and missing evidence disclosed
• Regulation 1620 — stated enclosure absent
• Other-state credits — potential credit and tracking issue discussed without deciding any other state's law
• Official Annotation 325.0685 — publishes the taxable result while omitting material provenance and credit guidance

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0685
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0685.pdf

Original ruling text

325.0685

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2637

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

August 4, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

Ms. C--- G--Tax Counsel
G--- Corporation
XXX --- Boulevard, Suite XXX
---, CA XXXXX-XXXX

BURTON W. OLIVER
Executive Director

Re: G--- Corporation
Dear Ms. G---:
This is a response to your letter dated June 21, 1994 regarding the application of sales tax to G---'s purchases of property when that property is eventually shipped to destinations outside the state. Few facts were provided about G---'s purchase and shipment operations. I assume that G--- purchases children's clothing in bulk from various manufactures within the state. These purchases are apparently delivered to a G--- distribution warehouse in California for separation, repackaging and shipment of a significant portion of these goods to G--- locations outside the state. I assume these goods are distributed and not sold by G--- to the out-of-state locations since you state that "our items are not held for resale. ..." You ask, "Is there an exemption certificate available to give to our vendors so that we may continue to receive goods during the transit process for repackaging but not taken for use within California?" Discussion Sales tax is imposed on a retailer's gross receipts from the retail sale of tangible personal property in California unless the sale is specifically exempted from taxation by statute. (Rev. & Tax. Code § 6051.) Thus, when G--- purchases children's clothing in California from a California vendor, the vendor's sale to your company is subject to sales tax unless an exemption applies. The tax on such a sale would be a sales tax on the clothing vendor. The amount itemized by the vendor to G--- as "sales tax" is actually a sales tax reimbursement, which the vendor may collect from G--- by contract. (See Civ. Code § 1656.1.) Your letter indicates an understanding that sales to G--- in this state will be subject to sales tax unless the sales tax exemption for interstate shipments applies. Revenue and Taxation

Ms. C--- G---

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August 4, 1994
325.0685

Code section 6396 provides this exemption from sales tax where, pursuant to the contract of sale, tangible personal property is required to be shipped and is shipped out-of-state by either the retailer or a carrier, customs broker or forwarding agent. This exemption does not apply if your company receives deliveries of children's clothing within the state even if the goods are ultimately repackaged and shipped to G--- locations outside the state. (See, Reg. 1620(a)(3)(B). A copy of this regulation is enclosed for your review.) Thus, G---'s purchase and receipt of goods inside the state are retail sales of tangible personal property subject to sales tax. The interstate shipment exemption only applies if G--- contracts with its vendors for direct shipments to its out-of-state locations without receiving any possession of the property within this state. You have provided no facts indicating that any other sales tax exemptions are relevant to G---'s situation. Your letter also indicates that you recognize that other states may provide G--- a credit against their taxes for the tax or tax reimbursement you pay to California vendors. You express a concern, however, in your ability to track such credits. If all your purchases take place in California, G--- should have no difficulty tracking tax reimbursements paid on goods shipped to out-of-state locations since you would have paid California sales tax reimbursement with respect to your entire inventory. If this is not the case, we recognize that it will be more difficult to track the property on which you paid California tax reimbursement. This added difficulty does not, however, form the basis for an exemption from the California sales taxes owed by your vendors. We suggest that you contact the states in which you will use this property and ask what type of documentation those states require in order to obtain a credit for tax reimbursement paid to California vendors. In summary, there are no exemptions to sales tax that appear relevant to G--- based on the facts of your letter. In particular, there is no "sales tax exemption certificate" that G--- can give its vendors in order to receive goods at its warehouse ex-tax for repackaging and later shipment out-of-state. If you have any further questions or facts which may alter the above analysis, feel free to write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:plh

Enclosure - Reg. 1620

Ms. C--- G---

cc: --- --- District Administrator - --

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August 4, 1994
325.0685