Was an asparagus-sizing machine exempt when its seller delivered it to the buyer's second California manufacturer for precise matching before Washington shipment?

Plain-English summary

T--- E--- Manufacturing dba E--- Manufacturing petitioned for redetermination of sales tax for January 1, 1984 through December 31, 1986. A $32,750 state, local and county measure concerned disallowed interstate-commerce sales. Hearing Officer Darrell B. Furnish heard the case in Bakersfield on June 27, 1989; the petitioner's vice-president appeared, along with a supervising and an associate tax auditor for the Department of Business Taxes.

The petitioner manufactured agricultural-processing equipment, began operations in June 1983 and had no prior audits. In October 1986 it orally contracted with D--- M--- Corporation to build an asparagus-sizing machine for use at the buyer's Washington facility.

The buyer first asked for the machine drawings so G--- D--- Corporation, a second California manufacturer, could match a related machine it was making for the same buyer. The petitioner's vice-president suggested physically dropping off its machine instead for precise matching. The buyer agreed and issued a purchase order calling for California shipment.

G--- D--- later completed its machine and shipped both units to Washington by common carrier. Audit staff taxed the petitioner's selling price because it delivered to the purchaser's California agent and because the written order required California—not outside-state—shipment. A C--- Freight Lines bill of lading supported that destination and named G--- D--- as consignee.

Regulation 1620(a)(3)(A) treated California delivery to the purchaser or its representative as taxable despite intended or actual later movement. Subpart (B) and section 6396 protected only contract-required outside shipment by the retailer through its facilities or delivery to a qualifying carrier, customs broker or forwarding agent. A business did not become such an intermediary merely because the purchaser designated it to receive and reship goods.

Furnish also cited Satco and Engs Motor Truck for California's constitutional ability to tax in-state delivery regardless of intended later outside shipment. He found no exemption even though G--- D--- undisputedly later shipped both machines to Washington.

The petitioner alternatively sought credit for Washington use tax that its vice-president said the buyer had reported paying. He also said the buyer would not reimburse California sales tax because it already paid Washington. Furnish explained that section 6406 credited other-jurisdiction tax against a California purchaser's use tax—the opposite of offsetting this California seller's sales-tax liability.

Furnish recommended redetermination without adjustment. The source does not contain the order, bill of lading, Washington tax proof, transcript or final Board disposition. The live annotation publishes only the machine-delivery holding and omits the $32,750 measure, Washington-credit issue, evidence, hearing and recommendation posture.

Common questions

Why was the second manufacturer the buyer's representative?

It received the petitioner's machine under the buyer's written order to perform precise matching with a related machine it was building for that buyer.

Did later common-carrier shipment to Washington cure the California delivery?

No. The purchase order and bill of lading showed the petitioner's contracted shipment ended at the California consignee; the second manufacturer made the later shipment.

Did making the machine for a Washington facility matter?

Not enough. The quoted regulation said outside-job specifications and an intention or actual later outside movement did not override California delivery.

Could designation as a carrier or forwarding agent have changed the result?

The regulation said a person not regularly engaged in compensated transport or shipment preparation does not become a carrier or forwarding agent merely by purchaser designation.

Why was no credit allowed for Washington use tax?

Section 6406 addressed a California purchaser's use-tax liability, not reduction of a California seller's sales-tax liability. The buyer's Washington payment was reported but not documented in the source.

Was $32,750 the tax due?

The decision says the protested liability was "measured by" $32,750 under state, local and county tax; it does not label that figure as the tax amount itself.

Was this the Board's final decision?

The source shows only the hearing officer's recommendation to redetermine without adjustment, not final Board action or a later appeal.

Citations and references

• California Sales and Use Tax Regulation 1620(a)(3)(A)–(B) — quoted California-delivery and retailer-shipment rules
• Cal. Rev. & Tax. Code § 6396 — interstate-shipment exemption implemented by the regulation
• Cal. Rev. & Tax. Code § 6406 — other-jurisdiction credit on a California purchaser's use tax
• Satco, Inc. v. State Board of Equalization, 144 Cal.App.3d 12 (1983)
• Engs Motor Truck Co. v. State Board of Equalization, 189 Cal.App.3d 1458 (1987)
• October 1986 oral agreement, later purchase order and C--- Freight Lines bill of lading — described but not reproduced
• September 13, 1989 hearing decision — recommendation without final Board action
• Official Annotation 325.0928 — publishes only the delivery holding

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0928
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0928.pdf

Original ruling text

STATE OF CALIFORNIA

325.0928

BOARD OF EQUALIZATION
APPEALS UNIT
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
T--- E--- MANUFACTURING
dba E--- MANUFACTURING
Petitioner

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HEARING
DECISION AND RECOMMENDATION

No. SR -- XX XXXXXX-010

The above-referenced matter came on regularly for hearing before Hearing Officer Darrell B. Furnish on June 27, 1989, in Bakersfield, California. Appearing for Petitioner:

Mr. R--- E--Vice-President

Appearing for the Department
Of Business Taxes

Mr. S. B. Stallings, Jr.
Supervising Tax Auditor
Ms. Claudia Marsh
Associate Tax Auditor
Protested Item

The protested tax liability for the period January 1, 1984 through December 31, 1986 is measured by: State, Local and County

Item
Sales in interstate commerce disallowed.

$32,750

Petitioner’s Contentions
1.
Delivery of equipment in California for subsequent shipment outside the state did not constitute a taxable transaction. 2. Alternatively, petitioner should be credited with the amount of Washington State use tax which the purchaser paid on the transaction.

T--- E--- MANUFACTURING
dba E--- MANUFACTURING

-2-

September 13, 1989
325.0928

Summary
Petitioner, a corporation, manufactures and sells agricultural processing equipment. The company began operations in June, 1983. There were no previous audits. In October 1986 petition contracted orally with D--- M--- Corporation to manufacture an asparagus sizing machine for use at D--- M---’s facility in ---, Washington. D--- M--- later requested petitioner to send its manufacturing drawings for the machine to G--- D--- Corporation in --- ---, California for the purpose of allowing G--- D--- to match the size with a machine it was manufacturing to be used by D--- M--- in conjunction with petitioner’s machine. Mr. E--- stated that he suggested to D--- M--- that the machine could be dropped off at G--- D---’s location in
[California] for precise matching of the two machines, as an alternative to sending the drawings. D--- M--- was agreeable to this arrangement and issued a purchase order which called for shipment of the machine to [California]. G--- D--- subsequently completed manufacture of its machine and shipped both units by common carrier to D--- M--- in ---, Washington. The audit staff asserted sales tax on the selling price of petitioner’s machine, contending it was delivered in this state to an agent of the purchaser. The staff further contends that shipment outside the state was not pursuant to terms of the contract, since the written purchaser order called for shipment to [California]. Mr. E--- stated he had been told by D--- M--- that they had paid Washington State use tax on the transaction. He said his company will not be reimbursed by D--- M--- for California sales tax because D--- M--- has already paid the tax to Washington. Analysis and Conclusions 1.

Sales and Use Tax Regulation 1620(a)(3) provides as follows:

(3) SALES PRECEDING MOVEMENT OF GOODS FROM WITHIN STATE
TO POINTS OUTSIDE STATE.
(A) To Other State - - When Sales Tax Applies. Except as otherwise provided in (B) below, sales tax applies when the property is delivered to the purchaser or the purchaser’s 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. It is immaterial that the contract of sale may have called for the shipment by the retailer of the property to a point outside this state, or that the property was made to specifications for out-of-state jobs, that prices were quoted including transportation charges to out-of-state points, or that the goods are delivered to the purchaser in this state via a route a portion of which is outside this state. Regardless of the documentary evidence held by the retailer…to show delivery of

T--- E--- MANUFACTURING
dba E--- MANUFACTURING

-3-

September 13, 1989
325.0928

the property was made to a carrier for shipment to a point outside the state, tax will apply if the property is diverted in transit to the purchaser or his representative in this state, or for any other reason it is not delivered outside this state. (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. As used herein the term “carrier” means a person or firm regularly engaged in the business of transporting for compensation tangible personal property owned by other persons and includes both common and contract carriers. The term “forwarding agent” means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm not otherwise so engaged does not become a “carrier” or “forwarding agent” within the meaning of this regulation simply by being designated by a purchaser to receive and ship goods to a point outside this state. (this subsection is effective on and after September 19, 1970, with respect to deliveries in California to carriers, etc., hired by the purchasers for shipment to points outside this state that are not in another state or foreign country, e.g., to points in the Pacific Ocean.) Regulation 1620(a)(3)(B), quoted above, implements the exemption from sales tax for interstate shipments provided by Section 6396 of the Revenue and Taxation Code. Like similar provisions of the Sales and Use Tax Law, Section 6396 is designed to accommodate federal constitutional restrictions on state taxation of sales in interstate commerce. If delivery occurs in California the transaction constitutionally may be taxed, regardless of any intent to subsequently ship the goods out of state. (Satco Inc. v. State Board of Equalization (1983) 144 Cal.App.3d 12, 16; Engs Motor Truck Co. v. State Board of Equalization (1987) 189 Cal.App.3d 1458). Section 6396 restricts the exemption for interstate shipments to those instances in which, pursuant to the contract of sale, shipment is made outside this state by the retailer by means of facilities operated by the retailer of by delivery to a carrier, customs broker or forwarding agent for shipment out of state. In this instance, petitioner delivered the property to a carrier for shipment to --- ---, California as evidenced by a C--- Freight Lines bill of lading showing the consignee as “G--- D--- Corp., XXXX --- Drive, --- ---, California XXXXX”. The Revenue and Taxation Code provides no exemption for this transaction even though it is undisputed that the property was subsequently shipped by G--- D--- to Washington.

T--- E--- MANUFACTURING
dba E--- MANUFACTURING

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September 13, 1989
325.0928

There is also no provision by which petitioner’s sales tax liability may be offset against use tax paid by the buyer to another state. Section 6406 provides for a credit against a California purchaser’s use tax liability for sales or use tax paid to another taxing jurisdiction. That is the opposite side of the coin to this situation, however. The relief petitioner seeks simply cannot be granted. Recommendation Redetermine without adjustment

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Darrell B. Furnish, Hearing Officer

9-13-89
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Date