Was diesel fuel exempt as an interstate sale merely because the seller delivered it into a common-carrier pipeline that could carry it out of California?

Plain-English summary

A redacted fuel seller's August 28, 1987 letter to Compliance Supervisor Patrick Farish described a diesel sale at a California refinery. Delivery was F.O.B. the common-carrier pipeline's receiving meter; title and risk passed to the buyer there, with volume determined by meter readings. The seller supplied only one contract paragraph, which is quoted but the full agreement is absent.

The receiving ticket named the supplier as “shipper” because it supplied the fuel, but identified the buyer as batch owner and did not show ultimate destination. The buyer became the actual shipper controlling the batch. One or more destinations were nominated at tender, but the buyer could divert all or part without supplier knowledge, including to a California terminal, because of storage limits or customer changes.

The buyer's monthly pipeline statement would report movement and actual delivery, but competitive and legal reasons made one company's data difficult for another to obtain. The request described particular outside deliveries, but all parties and locations are redacted and no tickets or statements are reproduced.

The sale was taxable because the contract apparently required only delivery to the carrier or buyer in California, not shipment to an out-of-state destination. Delivery into a pipeline capable of crossing state lines was not enough.

Four prior Board staff letters had said contract-required actual outside pipeline shipment could qualify. One August 13 letter from Compliance Supervisor R. O. Padilla said a meter ticket showing to whom fuel was shipped could support exemption. Counsel said the letters stated the law accurately but assumed the missing outside-shipment requirement. The seller itself believed the described sales were taxable, and counsel agreed.

The opinion explained how a future transaction could qualify. The contract must require carrier shipment outside California, the fuel must actually be delivered there, and the seller must keep evidence. The seller's meter ticket established receipt into the pipeline but not destination; a copy of the buyer's pipeline delivery ticket showing out-of-state delivery, retained with the meter ticket, would complete the documentation.

That solution is a possible restructuring, not an actual exempt transaction. The source supplies no revised contract, paired tickets, completed outside delivery, tax amount or later outcome. The live annotation preserves the pipeline mechanics and main results but omits the request, prior-letter provenance, one-paragraph contract limitation, data-access obstacle and missing proof.

Common questions

Why was the supplier named as shipper on the meter ticket?

Pipeline terminology used shipper for the supplier, who might not own the moving product; title had passed to the buyer.

Who controlled the fuel after meter delivery?

The buyer owned and controlled the batch and could change its nominated destination without the supplier's knowledge.

Did a receiving meter ticket prove outside delivery?

No. It showed pipeline receipt and batch ownership, not the ultimate destination.

What records could support a future exemption?

A contract requiring outside shipment, the seller's meter ticket, and a purchaser delivery-ticket copy showing actual outside delivery.

Why did the four prior letters not control?

They assumed the sales contracts required outside shipment; the supplied contract paragraph apparently did not.

Did the seller complete the suggested restructuring?

The source supplies no revised contract, paired records, exempt sale or later tax outcome.

Citations and references

• Regulation 1620(a)(3)(B) and (D) — contract-required carrier shipment and retained proof
• August 28 request, contract, pipeline tickets and statements — described or partly quoted but absent
• Four prior Board letters, including August 13 compliance guidance — described but not reproduced
• Official Annotation 325.0696 — publishes the pipeline analysis while omitting material provenance and proof limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0696
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0696.pdf

Original ruling text

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325.0696

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

(916) 445-5550

October 14, 1987

Dear
Your letter dated August 28, 1987 to Compliance Supervisor Patrick Farish has been referred to me for response. You ask whether certain deliveries of fuel into a common carrier pipeline are exempt from sales tax under Regulation 1620 as sales in interstate commerce. To illustrate the subject transactions, you have provided us the following example:
--- made a sale of diesel fuel to --- at --- refinery for delivery into the --Pipeline ---. The terms of the sale were FOB at the pipeline receiving meter, with title and risk of loss passing to the purchaser at the meter, and volumes based on meter readings. Because --- delivers the product into the pipeline the meter ticket will show --- as the shipper; the term 'shipper' means the supplier of the product, who mayor may not be the owner of the product moving in the pipeline. The pipeline receiving ticket does not show the ultimate destination, but does show to whom the batch belongs. As the supplier, --will receive a confirmation copy of the pipeline receiving record showing volumes delivered into the pipeline.... "When title passed meter ---became the owner of the product and the actual shipper, and the movement of the product in the pipeline was a batch, subject to their control. "… "The --- Pipeline runs West from the --- area with transfer points at --- into lines to --- or --- and at --- to lines going to Phoenix and beyond or the --Line to --- Terminals are located along the line between or at transfer points. "When a tender is made into the pipeline one or more destinations are nominated. However, it is possible for the shipper --- to divert all or part

of the volumes without the knowledge of the supplier ---. This may happen due to lack of storage capacity at the intended destination and/or a change in the shipper's customers requirements. “The --- transaction was delivered to --- and --- at their --- locations… However, the batch could have been diverted at any terminal along the line. For instance, --- could have diverted a portion of this batch to --- at -- by notifying --- to transfer it at --- and --- have locations in California. "This movement would be reported on the monthly pipeline statement to -- since they are the owner and shipper of the batch moved. The transaction would not be reported on --- statement from ---. For competitive and legal reasons, data from one company's statement is not readily available to another company." You have also included copies of four letters written by this Board's staff on this issue. Each letter stated that sales tax does not apply to sales when, pursuant to the contract of sale, the property is required to be shipped out of state, and is shipped out of state, by means of delivery by the seller to a common carrier, such as the pipeline used by ---. and
---. (See Reg. 1620(a)(3)(B).) To support the exemption for such sales, the seller must obtain and retain documentary evidence of the delivery of the property to a carrier for shipment outside this state. (Reg. 1620(a)(3)(D).) One of the four letters, dated August 13, 1987, was from Compliance Supervisor R. o. Padilla and related to --- sales to ---·through the pipeline. Mr. Padilla concluded that if the meter ticket provided by the pipeline to --- indicated to whom the fuel was shipped, it would support the exemption for the sale as one in interstate commerce. However, you believe that under the facts you have provided us, your sales to --- are taxable sales in this state. We agree. The letters you included all accurately state the law applicable to sales in interstate commerce. However, they all assume that the facts bring the sales within the stated requirements, including that the contract requires the property be sent out of state. The letters then address the documentation required to support those facts. Based on the facts you now provide us, we conclude that the sales are not exempt as sales in interstate commerce. The contract between --- and --- apparently does not require that the fuel be shipped out of state. You have provided us one paragraph from that contract. As shown by that paragraph, the contract apparently merely provides for delivery of the fuel to a carrier or directly to --- in this state. This does not satisfy the requirements of the exemption that the property be required by the contract to be shipped out of state. Therefore, --- sales to --- in California under the facts stated above are subject to sales tax. I note that, --- transactions could be structured to satisfy the requirements of the exemption. First, the contract would have to require that the fuel be delivered to a carrier for shipment out of state. Second, the fuel must actually be shipped out of state. As stated

in our previous letters, --- must retain documentation to establish that the fuel was delivered to the carrier and actually shipped out of state. The meter ticket --- receives does not indicate the place of delivery, but the delivery ticket received by the purchaser/ shipper does so indicate. We understand that the pipeline does not provide you the delivery ticket. However, if --- obtains from its purchaser, and retains, a copy of the delivery ticket showing delivery out of state, such copy, together with the meter ticket provided to --- by the pipeline, will satisfy the documentation requirements. If the contract required the fuel be shipped out of state, --- sale will be exempt. If you have further questions, feel free to write again.

Sincerely,

David H. Levine
Tax Counsel
DHL:ss