Did a buyer's unauthorized removal of a modified aircraft from a California facility count as taxable delivery by the seller?

Plain-English summary

A redacted corporation maintained, modified and serviced aircraft. It began business July 1, 1977 and had a prior audit through March 31, 1979. The disputed audit covered April 1, 1979 through December 31, 1981; a January 6, 1983 deficiency asserted tax on a $2,935,514 sale measure.

Under a February 15, 1979 agreement, the company would modify a Boeing 727 owned by a Bermuda corporation with no California office. Work at its Burbank facility included an executive interior, replacement fuel tanks, and upgraded avionics and electrical equipment. The contract required outside delivery, and the owner certified outside use. A December 20, 1979 deadline later became January 3, 1980. The agreement and certificate are absent.

Completion was delayed. On December 20, 1980, with little work remaining, the owner's agents secretly removed the aircraft and flew it to New York without notice or right. The modifier reported theft to Los Angeles police; once authorities learned the circumstances and found the aircraft in New York, no further criminal action occurred. Substantial work remained unpaid, so the modifier began New York arbitration.

The hearing officer concluded that the wrongful taking was not delivery by the seller. Delivery required participation, agreement, voluntary action, or at least permission, none of which existed when the buyer seized possession.

Commercial Code section 1201(14)'s voluntary-transfer definition applied only to listed instruments and documents, not this tangible property. The officer instead cited Black's Law Dictionary, Poor and Jones while reasoning that delivery depended on possession or control and party intent. The modifier said it would have prevented removal had it known.

The May 6, 1982 arbitration award granted payment for work, required the owner to return the aircraft to Burbank at its expense, and required the modifier to deliver outside California at its expense. The owner acknowledged its earlier removal lacked notice or right. It returned the aircraft July 23; the modifier performed final checkout and a test flight that day, then delivered outside California on July 24.

At the July 20, 1983 Sepulveda hearing, the auditor treated the 1980 taking as California delivery; the petitioner treated the 1982 transfer as the contractual delivery. The appearance fields for both sides are blank, while J. Adamo is listed as an observer. H. L. Cohen recommended deleting the protested item and redetermining without other adjustment, with the Petitions Unit to adjust. The signed audit-review and final Board outcome are absent.

The live annotation preserves the transaction and delivery conclusion but omits the audit period, deficiency, $2,935,514 measure, hearing, Bermuda buyer, modification detail, police/payment facts, authorities, missing records and recommendation-only posture.

Common questions

Why was the 1980 taking not a delivery?

The owner acted without notice or right, and the modifier neither participated, agreed, acted voluntarily nor permitted the transfer.

Did the Commercial Code definition decide the issue?

No. The quoted section covered listed instruments and documents, not tangible personal property such as the aircraft.

What did the arbitration restore?

Payment for completed work, buyer-funded return to Burbank, and modifier-funded delivery outside California under the original arrangement.

When did the officer find delivery occurred?

July 24, 1982, after the July 23 return, final checkout and test flight.

What tax amount was disputed?

The PDF gives a $2,935,514 measure on which the protested tax was based, not the tax dollars themselves.

Was deletion finally ordered by the Board?

The hearing officer recommended deletion and adjustment, but the source supplies no final Board action.

Citations and references

• Regulation 1620(a)(3)(A) — California delivery rule
• Commercial Code section 1201(14) — quoted voluntary-transfer definition, found inapplicable
• Black's Law Dictionary; Poor v. American Locomotive Co., 67 F.2d 626; Jones v. Young, 539 S.W.2d 901 — delivery and intent authorities cited
• Agreement, outside-use certificate, police report and arbitration award — described but not reproduced
• Audit, hearing and adjustment records — procedural facts stated; final Board action absent
• Official Annotation 325.0698.200 — publishes the delivery result while omitting material provenance and finality limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0698.200
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0698-200.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination of State
and Local Sales and Use Taxes

Petitioner

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325.0698.200
8/22/83

DECISION AND RECOMMENDATION

The above-entitled matter came on regularly for hearing on July 20, 1983, in Sepulveda, California, before H. L. Cohen, Hearing Officer.

Appearing for Petitioners:

Appearing for the Board:

Observer:

Mr. J. Adamo
Tax Counsel

Protest
Petitioner protests the assertion of tax on a sale claimed to be an exempt sale in interstate commerce. Tax was asserted based on an audit covering the period from April 1, 1979, through December 31, 1981. A deficiency determination was issued January 6, 1983. The amount upon which the protested tax is based is $2,935,514. Contention Petitioner contends that it did not deliver the aircraft in question in California, but delivered it outside this state. Summary Petitioner is a corporation engaged in maintenance, modification, and servicing of aircraft. It began in business July 1, 1977. The last prior audit was for the period through March 31, 1979. On February 15, 1979, petitioner entered into an agreement with, ---, a Bermuda corporation with no offices in California, to modify a Boeing 727 aircraft owned by ---. The modification included refurbishment of the interior for executive use, replacement of fuel tanks and upgrading of avionic and electrical equipment on the aircraft. The work was to be done at petitioner's Burbank facility. Petitioner was required to deliver the aircraft outside California and

--- certified that the aircraft modification was purchased for use outside California. The aircraft was to be delivered by December 20, 1979, initially, but the delivery date was later changed by mutual agreement to January 3, 1980. The aircraft was to be delivered by --- petitioner on February 23, 1979. Completion of the work was delayed, and --- became dissatisfied with petitioner's performance. On December 20, 1980, at which time only a small amount of work remained to be done, agents of --- surreptitiously removed the aircraft from petitioner's facilities and flew it to New York. Petitioner reported the taking of the aircraft to the Los Angeles Police Department as a theft. When the circumstances of the taking were discovered, and the aircraft was discovered to be in possession in New York, no further criminal action was taken. Petitioner had not been paid for a substantial amount of the work which had been performed and instituted arbitration proceedings in New York under the terms of the contract. The arbitration decision, which was issued May 6, 1982, awarded petitioner payment for work done, provided that --- would return the aircraft at its expense to petitioner's Burbank facility, and provided for petitioner to deliver the aircraft to --- at a point outside California at petitioner’s expense. --- acknowledged that it had removed the aircraft from petitioner's facility without notice or right. The aircraft was returned by --- to petitioner on July 23, 1982. Petitioner conducted a final checkout and test flight on that date, and delivered the aircraft to --- in --- on the next day July 24, 1982. The auditor concluded that delivery of the property sold by petitioner to --- occurred on December 20, 1980, when --- agents removed the aircraft from petitioner’s facilities. The sale was regarded as having taken place in California and tax was asserted on the amount of the sale. Petitioner contends that the order of the arbitration panel for return of the aircraft to California was for the purpose of allowing petitioner to deliver the aircraft outside California and thus avoid sales tax as was contemplated in the contract. Petitioner contends that the taking of the aircraft by --- agents did not constitute delivery by petitioner, because the transfer was not voluntary. Petitioner points out that Section 1201(14) of the Commercial Code defines "delivery" as a voluntary transfer. Petitioner states that it would have taken steps to prevent --- agents from taking the aircraft had petitioner known of --- plans. Petitioner argues that delivery took place in
--- on July 24, 1982; therefore, the sale was an exempt sale in interstate commerce. Analysis and Conclusions Sales and Use Tax Regulation 1620 provides in subdivision (a) (3) (A) that sales tax applies when the property sold 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. --- agents obtained possession of the aircraft in this state. The question is whether the taking of the aircraft by the agents of --- constituted a delivery in this state by petitioner. Petitioner cites subdivision (14) of Section 1201 of the Commercial Code as support for its position that it did not deliver the aircraft in California. That subdivision reads:

"(14) 'Delivery' with respect to instruments, documents of title, chattel paper or securities means voluntary transfer of possession." This subdivision, by its terms, does not apply to delivery of tangible personal property. Black's Law Dictionary defines "delivery" as the act by which the res or substance thereof is placed within the actual or constructive possession or control of another. Poor v. American Locomotive Co., 67 F.2d 626. What constitutes delivery depends largely on the intent of the parties. Jones v. Young, 539 S.W.2d 901. It appears that the concept of "delivery" comprises elements of participation, agreement, or voluntary action. The concept could also include permissiveness if not action. Here the taking by --- involved none of these elements. We conclude that petitioner did not deliver the airplane to --- in California on December 20, 1980. To conclude otherwise would be to negate an important element of the arbitration decision, which was to return the parties to their original positions. Petitioner is regarded as delivering the aircraft to --- on July 24, 1982. Recommendation Delete the protested item from the amount subject to tax. Redetermine without other adjustment. Petitions Unit to make adjustment.

8/22/83
H. L. Cohen, Hearing Officer

Date

REVIEWED FOR AUDIT:

Principal Tax Auditor

Date