Was tooling sold to a foreign customer exempt when the California manufacturer kept it after full payment and might use it before any export?

Plain-English summary

C--- D--- of N--- M---, Inc. wrote on September 7, 1993 about tooling sales to customers from other countries. The Board had outlined the law generally on August 5. Neither letter is published.

The manufacturer supplied two documents. One was a two-page August 29, 1992 proposal for the S--- - G--- project in Israel. The other was S--- purchase order #DSX-SXXX, dated October 22, 1992.

The three-page order referred to reverse-side terms and conditions "or [sic] purchase," but the reverse was not supplied. Page one had a handwritten "Shipped 3/2/93" notation near a circled lump-sum tooling price. Counsel said this suggested Israel shipment before manufacture of anything beyond the first article, but nothing verified whether or how shipment happened.

Page three said S--- would own the molds and tools after full payment; N--- would hold them for S---; and S--- could take possession at any time. The documents did not require ultimate foreign delivery, and the earlier letter reportedly said the tooling would always remain in California.

Regulation 1620(a)(3)(C)2 required foreign destination, irrevocable commitment to export when sold and actual foreign-country delivery before use. Counsel explained that if the contract imposed no foreign-delivery duty and the tooling remained with the manufacturer in California after payment, tax would apply to the full tooling sale. If it always remained here, counsel cited Annotation 325.0960 for tax on all tooling gross receipts. He did not know whether the complete contract imposed an export duty or whether export actually occurred.

Even an export duty would not help if the manufacturer functionally used the tooling—such as for a production run—before foreign delivery. A contract requiring export, actual compliance with Regulation 1620 and no California functional use could qualify. Making only a test article or articles would not itself count as functional use or defeat the tooling exemption.

The manufactured products presented a separate possibility: their sales might qualify if the products themselves were exported under the regulation's requirements.

Tax Counsel Donald L. Fillman could not give a positive opinion because he lacked the complete facts. He did not know the event sequence, whether functional use occurred or would occur, whether a contractual export duty existed, or when or whether export occurred.

The live annotation publishes the general alternatives but omits the incomplete-document and unverified-shipment problems. It says the manufacturer merely "tests the tooling," while the PDF more specifically protects making only test articles.

Common questions

Did full payment and customer ownership create an export exemption?

No. Counsel said tax would apply if the contract lacked a foreign-delivery duty and the tooling remained in California. The missing contract terms prevented a conclusion about this transaction.

What did the handwritten “Shipped 3/2/93” note prove?

Nothing conclusively. Counsel said it made early Israel shipment appear possible but had no verification of whether or how it occurred.

Would a production run before export defeat exemption?

Yes under counsel's analysis. Manufacturing a run of product was functional California use before foreign delivery.

Could the manufacturer make test articles?

Yes. Making only a test article or articles was not itself treated as functional use that disqualified an otherwise qualifying tooling export.

Were sales of the manufactured products necessarily taxable?

No such final answer appears. Counsel said those sales might be eligible if the products were exported under Regulation 1620's stated requirements.

Why was no transaction-specific answer given?

The reverse terms and shipment proof were missing, and counsel did not know the sequence, functional use, export obligation or actual export status.

Citations and references

• California Sales and Use Tax Regulation 1620(a)(3)(C)2 — three-part foreign-commerce test quoted; full enclosure absent
• August 5 and September 7, 1993 letters — identified but not reproduced
• August 29, 1992 Israel-project proposal — described but absent
• October 22, 1992 S--- purchase order #DSX-SXXX — incomplete reverse terms and unverified shipment note
• Annotation 325.0960 dated August 6, 1953 — cited for tooling always retained in California
• December 16, 1993 Tax Counsel response — no positive opinion on incomplete facts
• Official Annotation 325.1070 — publishes the general conditions while omitting the source uncertainties

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1070
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1070.pdf

Original ruling text

325.1070

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2641

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

December 16, 1993

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

Ms. C--- D--N--- M---, Inc.
XXX --- Avenue
--- ---, Ca XXXXX
Re:

BURTON W. OLIVER
Executive Director

SR -- XX-XXXXXX

Dear Ms. D---:
This is in response to your letter dated September 7, 1993, regarding the application of sales and use taxes to sales of tooling to customers from other countries. By letter of August 5, 1993, we outlined the law generally. You have now provided us with copies of actual documents to review, and have requested our opinion as to these documents. We were provided with two documents. The first is a two page proposal of yours concerning the S--- - G--- project, Israel, dated August 29, 1992. The second document is a three page Purchase Order of S---, #DSX-SXXX, dated October 22, 1992. A printed portion states "See reverse side for terms and conditions or [sic] purchase." We were not provided with the back portion which may contain terms that would be helpful in this analysis. There is a handwritten notation on page one, near where the lump-sum price for the tooling is circled, that says "Shipped 3/2/93". This makes it appear that the tooling was shipped to Israel before any but the first article was manufactured, but we have nothing that verifies if or how shipping took place. In addition, a typed portion on page three reads: "After full payment the molds & tools for the above mentioned items will become the property of S--- and held by N--- on behalf of S---. S--- reserves the right to take possession of these items at any time." To be exempt as a sale in foreign commerce, "the property must be intended for a destination in a foreign country, it must be irrevocably committed to the exportation process at the time of sale, and must actually be delivered to the foreign country prior to any use of the property." (Reg. 1620(a)(3)(C)2.)

Ms. C--- D---

-2-

December 16, 1993
325.1070

If payment is made in full, but the tooling is held by you on behalf of your customer, without a contractual duty to deliver or ship it to a foreign destination, the sale of the tooling is fully taxable as a sale which takes place in California. The same would be true even if you did have a contractual duty to deliver or ship the property to a foreign destination, if a functional use is made of the tooling by you, such as manufacturing a run of product, before it is delivered or shipped to the foreign destination. It appears that the intent of the contract is to have you keep the tooling until some undetermined time in the future. Even then, there is nothing in these documents which require that the property be ultimately delivered or shipped to a foreign destination. Your prior letter indicated that the tooling will always remain in California. If so, sales tax applies to the entire gross receipts from the sale of the tooling. (Annot. 325.0960, 8/6/53.) The only sale that may be eligible for the foreign commerce (export) exemption would be the sale of the manufactured products, provided they are exported under the above cited requirements. (See Reg. 1620, copy enclosed.) If your contract provides for export of the tooling, and the export meets the requirements of Regulation 1620, including no functional use of the property in this state, the export exemption will apply. Your making of only the test article or articles with the tooling will not be treated as a functional use, and will not in and of itself disqualify the sale of the tooling from the export exemption. We are still not able to provide you with a positive opinion on your fact situation, because we do not have all the facts. We are not certain of the sequence of events, whether there has been or will be a functional use of the tooling in California, whether there is a contractual duty to export the tooling, or when or if the tooling has or will be actually exported. If you have other questions, please contact me. Sincerely yours,

Donald L. Fillman
Tax Counsel
DLF:wk
Enclosure: Reg. 1620