Did Vendor A retain interstate-sale exemption when its component went to Vendor B in California for integration and testing before outside shipment?

Plain-English summary

J--- A. H---, corporate tax manager for H--- - P--- Company, wrote on March 21, 1995 about components acquired by an outside-state H--- factory for use there. Vendor A and Vendor B were both in California, and separate purchase orders required each to ship its product to the factory outside the state.

The buyer would furnish the common carrier. Vendor A's product had to work with Vendor B's product, and Vendor B would integrate and test the two at its California site before final shipment.

After Vendor B's work, Vendor A would go there and prepare its own product for shipment because it required special packaging and handling that Vendor B would not accept responsibility for. A buyer-funded carrier would collect both products. They would have separate shipping documents but could ride on the same truck.

The terms were f.o.b. origin, with title passing to H--- at common-carrier delivery. Vendor A would receive a final ten-percent payment only after acceptance at H---'s outside-state site.

Section 6051 supplied the general taxable-sales rule. Section 6396 and Regulation 1620(a)(3)(B) protected contract-required outside shipment by the retailer or a qualifying intermediary, while subpart (A) warned that delivery to the purchaser or its representative in California remained taxable.

Quoted Annotation 325.0920 allowed a temporary handoff solely for visual inspection or testing if the property returned to the seller for contract-required outside shipment. Quoted Annotation 570.0410 treated California-vendor machinery as taxable after in-state setup with a counterpart for performance testing, employee training and burn-in before outside shipment.

Senior Staff Counsel Patricia Hart Jorgensen read the buyer's own words—Vendor A's product "must be used with" and integrated and tested with Vendor B's—as suggesting more than inspection or defect testing. If so, H--- took delivery of Vendor A's product in California and the interstate-sale exemption failed.

The answer remained conditional because the request supplied limited facts about what actually happened at Vendor B. The live annotation publishes the same conditional result but says Vendor A arranged delivery, while the PDF says Vendor A prepared its specially handled product and the buyer supplied and funded the carrier.

The first page and annotation date the opinion June 19, 1995. Pages 2–4 instead carry August 2, 2006 footers. No correction or explanation resolves that later date.

Common questions

Could temporary testing at Vendor B preserve exemption?

Possibly, if possession was limited and temporary for visual inspection or defect testing and all contract-required outside-shipment conditions were met.

Why did integration point toward tax?

The buyer said the products had to be used together and integrated and tested at Vendor B. Counsel viewed that as more than narrow inspection and therefore as buyer delivery in California.

Who arranged and paid for the common carrier?

The request said H--- furnished the carrier, which was arranged for both vendors at H---'s expense. The PDF does not name the carrier or reproduce shipping records.

Did two shipping documents matter?

The proposal used two separate shipments and documents even if both products traveled on one truck. Counsel did not treat that paperwork alone as overcoming California customer use.

Did f.o.b.-origin title or the final ten-percent payment decide the result?

No. Those were stated terms, but counsel focused on the nature of the California possession and activity at Vendor B.

Which issue date controls?

June 19, 1995 appears on the first page and live annotation. The unexplained August 2, 2006 continuation footers are preserved as a source conflict, not substituted as the issue date.

Citations and references

• Cal. Rev. & Tax. Code § 6051 — taxable California retail-sales rule
• Cal. Rev. & Tax. Code § 6396 — interstate-commerce exemption
• California Sales and Use Tax Regulation 1620(a)(3)(A)–(B) — quoted delivery and shipment provisions; stated enclosure absent
• BTLG Annotation 325.0920 (November 16, 1964) — quoted temporary inspection/testing rule
• BTLG Annotation 570.0410 (August 23, 1993) — quoted testing, training and burn-in rule
• March 21, 1995 corporate-tax-manager request — extensively quoted but not reproduced
• June 19, 1995 opinion / August 2, 2006 continuation footers — unresolved official date conflict
• Official Annotation 325.1075 — publishes the conditional more-than-testing result

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 325.1075
• Original supporting opinion: 325.1075 PDF

Original ruling text

325.1075

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 327-2291
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL

Controller, Sacramento

June 19, 1995
BURTON W. OLIVER

Executive Director

Mr. J--- A. H--Corporate Tax Manager
H--- - P--- Company
XXXX --- Street, MS XX---- ---, CA XXXXX
Re: SY -- XX-XXXXXX
Dear Mr. H---:
This is in response to your letter dated March 21, 1995, in which you requested tax advice regarding components manufactured or sold by California companies which are acquired by an out-of-state H--- - P--- factory for use outside of the state. You describe the transaction as follows: "Vendor A and vendor B are both located in California. An H--- factory located outside of California places a separate purchase order with each of these vendors. Each purchase order requires the vendor to ship the property to H--- located outside of California. H--- will furnish the common carrier for each out of state shipment. "Vendor A's product must be used with Vendor B's product. Vendor B's product must be integrated and tested with Vendor A's product at Vendor B's site. Vendor A, being required to ship the property to H--- outside California is also required to ship the property to Vendor B with final shipment to follow after Vendor B has completed its integration and testing.

Mr. J--- A. H---

-2-

August 2, 2006
325.1075

"Upon completion of Vendor B's work, Vendor A will go to Vendor B's site and prepare Vendor A's product for shipment. Vendor A's product requires special packaging and handling which Vendor B does not want to be responsible. The common carrier arranged for A and B but at H---'s expense picks up both vendor's products at Vendor B's site and delivers the property outside California. There will be two separate shipments with separate shipping documents, however both shipments may go out on the same truck at the same time." You state that the shipping terms are F.O.B. origin with title to pass to H--- upon delivery of the property to the common carrier. A final 10 percent payment will be made to Vendor A upon final acceptance at H---'s site outside of California. It is your position that Vendor A's sale qualifies as an exempt interstate sale despite the fact that it was first delivered in California to Vendor B. Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempted by statute. (Rev. & Tax. Code § 6051.) Revenue and Taxation Code section 6396, provides an exemption for sales in interstate commerce. This exemption is explained in subdivision (a)(3)(B) of Sales and Use Tax Regulation 1620 (copy enclosed): "Shipments Outside the State--When Sales Tax Does Not Apply. Sales tax does not apply when the property pursuant to a contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer, by means of: "l.

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 acarrier' 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." Regulation 1620(a)(3)(A) provides the caveat that regardless of the intent to deliver the property outside of this 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 is not delivered outside this state."

Mr. J--- A. H---

-3-

August 2, 2006
325.1075

As explained in your letter the goods are required to be shipped to a point outside of California by a common carrier. The question here is whether the delivery of Vendor A's product to Vendor B's premises constitutes a delivery to H--- or H---'s representative within this state. California Business Taxes Law Guide (BTLG) Annotation 325.0920 (11/16/64) provides: "Inspection by Purchaser. If the contract of sale requires the seller to ship the goods sold to an out-of-state point and in fulfillment of the contract the seller, in fact, so ships the property, a prior temporary transfer of possession to the buyer for visual inspection or testing will not deprive the seller of the interstate commerce exemption, provided the property is returned to the seller for out-of-state shipment in accordance with the contract of sale." If the transferred possession to Vendor B is a temporary transfer for the limited purpose of visual inspection or testing, then it appears that the interstate exemption may apply. However, you state: "Vendor A's product must be used with Vendor B's product. Vendor B's product must be integrated and tested with Vendor A's product at Vendor B's site." This statement connotes that more than "visual inspection or testing" will occur at Vendor B's premises. If more than testing occurs at Vendor B's premises then the nature of H---'s possession is more than the limited and temporary possession contemplated by the annotation. Rather, H--- would be regarded as taking delivery of Vendor A's product in California and sales tax would apply. This is explained in BTLG Annotation 570.0410 (8/23/93) which provides: "Testing and Training. Machinery is purchased from a California retailer or an out-of-state vendor, delivered to a California location, and set up alongside a counterpart for: "1.

Testing to insure it performs as required.

"2.

Training key employees from the out-of-state facility.

"3.

`Burning-in.'

"Upon completion of these functions, the machinery will be shipped to the out-of-state facility. If the machinery is purchased from California vendors, delivered in this state, and later shipped out-of-state, the transaction is subject to sales tax." From the limited facts you have provided it appears that the use of Vendor A's product at Vendor B's California facilities constitutes more than just a test for product defects. If this is the case, the sales tax exemption for purchases in interstate commerce will not apply.

Mr. J--- A. H---

-4-

If you have any further questions please feel free to write again. Sincerely

Patricia Hart Jorgensen
Senior Staff Counsel

PHJ:cl
Enclosure
cc:

--- --- District Administrator

August 2, 2006
325.1075