Could an Oklahoma corporation buy motorcycles for resale, customize them in California and export them to foreign buyers before functional use?

Plain-English summary

An Oklahoma corporation bought motorcycles around the United States. Its production manager in La Quinta was an independent contractor rather than employee. After customization, the company arranged freight-forwarder pickup in La Quinta and export to a foreign buyer in Japan or Europe.

The company recently bought a motorcycle from a California dealer that insisted on sales-tax reimbursement, which the company paid. Senior Tax Counsel David H. Levine explained that the dealer owed any sales tax, while a contractual amount itemized to the purchaser as "sales tax" was reimbursement under Civil Code section 1656.1.

Customization was not taxable use when the company resold a motorcycle before any functional use. It could offer the dealer a resale certificate, but the dealer was not required to accept one.

Writing "for resale" instead of a California seller's-permit number was insufficient, and Oklahoma incorporation did not decide permit status. If the company made only qualifying interstate or foreign-commerce sales to nonresidents, it needed no permit and could put an appropriate explanation in the certificate's permit-number space. Taxable California sales or motorcycles sold for California use required a permit; omitting its number then invalidated the certificate.

Section 6091 left the dealer responsible for proving a sale was not retail unless it timely accepted a valid certificate in good faith. A dealer could refuse even a valid offer and treat the motorcycle sale as retail.

When a dealer refused the certificate and collected sales-tax reimbursement, the exporter could not take a tax-paid-purchases-resold deduction because it reported no California sales tax against which to deduct the amount. With the dealer's cooperation, the dealer could instead pay the tax, file a refund claim proving the sale was for resale, and return the reimbursement if the refund was allowed.

Regulation 1701's example bought property for $100, resold it for $125 and deducted the $100 tax-paid purchase from the resale measure, leaving a $25 net difference. That mechanism was a deduction from reported California tax, not a credit or standalone refund for a business reporting none.

The company's practical choices were another dealer or absorbing reimbursement. A cooperative dealer could collect and remit tax, then file a claim stating the amount, relevant dates and resale basis, with proof and a copy of the opinion. Any refund would be conditioned on returning reimbursement to the corporation.

The source shows no actual certificate, permit, deduction or refund outcome. Its continuation pages print 325.100 instead of 325.1100. The live annotation omits the dealer-discretion, reimbursement, deduction and refund issues.

Common questions

Did customization count as functional use?

No under the stated condition that the motorcycle would be resold before any functional use.

Could the corporation replace a permit number with “for resale”?

No. That phrase was a separate required certificate element, not a substitute for a permit number or an explanation of why no permit was required.

Did Oklahoma incorporation eliminate California permit duties?

No. Permit need depended on California taxable sales, not the corporation's domicile.

Could the motorcycle dealer reject a resale certificate?

Yes. California law, as described in the letter, did not force a seller to accept one.

Why could the exporter not use the tax-paid-purchases-resold deduction?

It reported no California sales tax from which to take the deduction. Counsel emphasized that the mechanism was not a credit.

How could reimbursement potentially be recovered?

With dealer cooperation, the dealer could remit the tax, prove the sale was for resale in a refund claim, and return the reimbursement if California refunded the dealer.

Does the source show that a refund was filed or paid?

No. It suggests a procedure but supplies no claim, amount, proof, decision or reimbursement return.

Citations and references

• Cal. Rev. & Tax. Code §§ 6007 and 6051 — retail-sale and resale distinction
• Cal. Civ. Code § 1656.1 — contractual sales-tax reimbursement
• California Sales and Use Tax Regulation 1620 — California possession and qualifying commerce
• California Sales and Use Tax Regulations 1668(b)(2) and 1699 — certificate and permit rules
• Cal. Rev. & Tax. Code § 6091 — seller's proof burden and valid-certificate protection
• California Sales and Use Tax Regulation 1701 — tax-paid-purchases-resold deduction; enclosure absent
• March 5, 1992 corporation request — identified but not reproduced
• April 23, 1992 opinion — conditional customization, permit, deduction and refund guidance
• Official Annotation 325.1100 — publishes only the customization and permit/certificate conclusions

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1100
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1100.pdf

Original ruling text

325.1100

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

April 23, 1992
--Re: ---, Inc.
Dear ---:
This is in response to your letter dated March 5, 1992. You ask whether sales tax applies to your customization of motorcycles in California. You purchase A motorcycles from locations throughout the United States and thereafter customize them. You state that your production manager, XXX in La Quinta, California, is not your employee but rather is an independent contractor. After the customization is complete, you arrange to have a freight forwarder pick up the motorcycle in La Quinta and export it to a foreign buyer in Japan or Europe. You recently purchased a motorcycle from a dealer in California and the dealer insisted that you pay sales tax (reimbursement), which you did. You ask several questions related to whether sales tax applies to such sales to you in California. A retailer owes sales tax on the retailer's retail sale of tangible personal property in California. (Rev. & Tax. Code § 6051.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) The sales tax on a retail sale in California is applicable even if, after taking possession of the purchased property in California and prior to any functional use of it, the purchaser ships it outside California. (See generally Reg. 1620.) Thus, when you purchase a motorcycle in California from a California motorcycle dealer, the dealer's sale to you is subject to sales tax unless you are purchasing the motorcycle for resale in the regular course of your business. (Rev. & Tax. Code § 6051.) The tax on such a sale would be a sales tax on the motorcycle dealer. The amount itemized by the dealer to you as "sales tax" would actually be sales tax reimbursement, which the dealer may collect from you by contract. (See Civ. Code § 1656.1.) On the other hand, if you will resell the motorcycle prior to any use of it, the dealer's sale to you is a sale for resale and would not be subject to sales tax. (Rev. & Tax. Code §§ 6007, 6051.) We agree that the customization process is not a taxable use of the motorcycle if that motorcycle will be resold prior to any functional use. Under such circumstances, you may offer to issue a resale certificate to the vendor in order to avoid paying sales tax reimbursement when purchasing the motorcycle; however, the vendor is not required to accept it. (See Reg. 1668, a copy of which is enclosed.) You state that you were advised that you could complete a resale certificate as shown in Regulation 1668, and that instead of including a seller's permit number you could substitute "for resale" with your correct corporate name. You understand that since you are an Oklahoma corporation, this would suffice. This is incorrect. The phrase "for resale" is not a substitute for a valid California seller's permit number. Rather, the phrase "for resale" is one of the required elements that any valid resale certificate must contain. Further, that you are an

Mr. ---

-2-

April 23, 1992
325.100

Oklahoma corporation is irrelevant under these circumstancese for purposes of application of the California Sales and Use Tax Law. For example, you could remain an Oklahoma corporation and open a motorcycle shop in California, making sales to California residents from that shop. Notwithstanding that you are an Oklahoma corporation, under such circumstances you would be required to hold a California seller's permit. Similarly, a California corporation who only makes sales in interstate and foreign commerce to non-California residents is not required to hold a California seller's permit, even though it is domiciled and incorporated in California. (Reg. 1699.) Applying these rules, we agree that you would not be required to hold a California seller's permit if none of your sales were made in this state except sales made in interstate or foreign commerce to non-California residents which qualify for exemption as explained in Regulation 1620. Under such circumstances, and as specifically explained in Regulation 1668, you may issue valid California resale certificates; however, in the location for seller's permit number you must insert an appropriate notation that you are not required to hold a California seller's permit for that reason. (Reg. 1668(b)(2).) Please note that if you make any sales in California which are not exempt from sales tax as sales in interstate or foreign commerce, or if you make any sales of motorcycles for use in California, then you would be required to hold a California seller's permit. Under such circumstances, a resale certificate omitting your valid California seller's permit number would not be valid. As noted above, the person who owes the sales tax is the retailer. For purposes of the proper administration of the tax, all of that retailer's gross receipts are presumed to be subject to sales tax until the contrary is established. A seller has the burden of proving that a sale of tangible personal property is not a sale at retail unless that seller accepts from the purchaser in good faith a timely and valid resale certificate. (Rev. & Tax. Code § 6091, Reg. 1668.) In the transaction about which you inquire, the motorcycle dealer is the person liable for the sales tax, if any, on the sale of the motorcycle to you. It is possible that the dealer refused to accept the resale certificate that you offered since it was clearly incomplete (it lacked a seller's permit number or an explanation for the reason you are not required to hold a California seller's permit). Another reason might have been that the dealer refuses to accept a resale certificate that does not contain a California seller's permit number since that dealer is the person who must establish that the certificate is valid. There is nothing in California's Sales and Use Tax Law which requires the seller to accept a resale certificate if the seller chooses not to. Usually, a person purchasing property for resale under circumstances where the seller refuses to accept a resale certificate does not face the same problem as you do. The reason for this is that a retailer reporting California sales and use tax may take a deduction from his or her sales and use tax liability for "tax-paid purchases resold." This is explained in Regulation 1701, a copy of which is enclosed. An example of this procedure is as follows. A person purchases property for $100 and pays sales tax reimbursement to her vendor. She thereafter resells the property at retail for $125, and collects sales tax reimbursement on that $125 from her purchaser. She then reports the sales tax on that sale measured by $125. From that measure of sales tax she deducts $100 for the amount of the sales price of merchandise for which she paid sales tax reimbursement and thereafter sold prior to any use. That is, although she pays tax on the full $125 sale price of the property she sold at retail, her net liability is the tax on the difference of $25. Unfortunately, the tax-paid purchases resold deduction is not applicable to your business. In order to take the deduction, the retailer must report to this Board California sales tax from which the deduction is taken. If the retailer has no sales tax liability to this state, then there is no deduction allowed. That is, this is a deduction and not a credit. The retailer may not file a claim for refund for the amount of these taxes unless the retailer

Mr. ---

-3-

April 23, 1992
325.100

actually reported sales tax to this Board in an amount at least equal to the amount of the claim for refund (the reason for the claim would be that the retailer simply failed to take the deduction in the quarter in which it should have been taken). In summary, we agree that customization is not a taxable use under circumstances where you will resell the motorcycle prior to any functional use. You may issue resale certificates in order to avoid paying sales tax reimbursement to your vendors, however the vendors are not required to accept them and may choose to treat the sale to you as a retail sale. If the retailer refuses to accept a resale certificate, you will be unable to avail yourself of the tax-paid purchases resold deduction since you report no sales tax to California. Under such circumstances, the choices within your control are to decide whether to purchase the motorcycles from some other vendor or to incur the added cost of the sales tax reimbursement charged by dealers refusing to accept resale certificates from you. There is one final possibility, but it requires the cooperation of your vendor. Using the following procedure, your vendor can protect itself against owing sales tax without receiving reimbursement from you for that tax liability and still return the reimbursement from you. The first part of this procedure involves doing just what your vendor did: treat the sale as a retail sale, collect sales tax reimbursement from you, and pay the sales tax to California. Upon doing so, the vendor has paid the potential sales tax that the vendor might owe on the sale. The vendor can thereafter file a claim for refund of that tax. As noted above, when your vendor fails (or refuses) to take a valid resale certificate in good faith, sales tax applies unless the vendor proves the sale was for resale. Assuming the transaction is as described above, with the necessary documentation (from you) your vendor should be able to establish that the sale was for resale. Upon proving that such is the case, the tax would be refunded to your vendor conditioned on your vendor's refunding the sales tax reimbursement to you that your vendor had collected from you. We suggest that you ask your vendor to file a claim for refund of the tax you reimbursed him for to our Refunds Unit at the address above. The claim should specify the amount of the claim, the relevant dates, and the basis for the claim (i.e., the sale was for resale). We suggest also that your vendor include a copy of this letter with the claim. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl:4026E
Enclosures
bc: Out-of-State District Administrator