Did a California foreign-trade zone generally exempt sales or use tax because federal law protected some zone property from ad valorem tax?

Plain-English summary

The PDF said Congress established foreign-trade zones in 1934 so foreign and domestic merchandise could enter without duties or bond for further processing or manipulation. Customs duties applied when merchandise actually entered the United States.

The live annotation adds that zone merchandise generally could be stored, sold, exhibited, repacked, assembled, distributed, sorted, graded, cleaned, mixed, displayed, manufactured or otherwise manipulated without U.S. customs laws, then exported or destroyed. It says that customs exemption did not cover machinery and equipment imported for use within a zone.

It also quotes 19 U.S.C.A. section 81o(e)'s state-and-local ad valorem exemption and distinguishes Board-administered taxes based on price or volume. On that distinction, foreign-trade-zone location created no general California sales- or use-tax exemption.

A zone retailer's sale delivered to a California purchaser was taxable like another California delivery. A California retailer's delivery into a California zone also remained taxable, with the live annotation adding “unless otherwise exempt.”

A sale from inside the zone could avoid tax when shipped outside California by retailer-hired facilities or by retailer delivery to a carrier, customs broker or forwarding agent. Staff treated that transaction like other interstate or foreign-commerce sales. The PDF's sentence is malformed; the live annotation supplies the readable alternative wording.

Use inside the zone likewise remained subject to use tax. The letter acknowledged an arguable federal-preemption theory—that state action reducing Congress's competitive advantage could be prohibited—and cited National Distillers, but said it knew of no federal authority prohibiting California use tax in this instance.

Section 6009.1 separately excluded property brought into the zone for processing, fabrication, manufacture into, attachment to or incorporation into other property transported and used solely outside California.

The live annotation also gives a historical four-zone list—San Francisco, San Jose, Long Beach and Oakland—and a March 25, 1987 Long Beach expansion into a Santa Ana subzone. Those statements are preserved as historical annotation content, not a current zone count.

No identified taxpayer, transaction, zone use, shipment, tax amount or later proceeding is supplied.

Common questions

Did the federal ad valorem exemption remove California sales and use tax?

No. The live annotation distinguished property-value tax from Board business taxes based on sales price or volume and said the latter applied as elsewhere in California.

Was a zone retailer's California delivery taxable?

Yes, like another tangible-personal-property sale delivered to a California purchaser.

Could a zone retailer ship outside California without tax?

Yes under the stated route: retailer-hired facilities or retailer delivery to a carrier, customs broker or forwarding agent for outside-state shipment.

Was property delivered into and used inside the zone exempt?

No general sales- or use-tax exemption applied. The live annotation preserves the ordinary caveat that another exemption could still apply.

What did section 6009.1 cover?

Property entering the zone for specified processing, fabrication, manufacture, attachment or incorporation into other property destined for transport and sole use outside California.

Did counsel definitively reject federal preemption?

No. The letter acknowledged arguable contrary support but said it knew of no federal authority prohibiting the use tax in the described instance.

Citations and references

• 48 U.S. Stats. at L., ch. 590 and 19 U.S.C. § 81a et seq. — zone establishment and customs framework
• 19 U.S.C.A. § 81o(e) — live annotation's ad valorem quotation
• Cal. Rev. & Tax. Code § 6009.1 — qualifying export-processing use exclusion
• National distillers Products Corp. v. San Francisco Co., 141 Cal.App.2d 651 (1956) — source wording; reporter resolves to City & County of San Francisco
• Official Annotation 325.1270 — substantial customs, property-tax and historical-zone supplement

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1270
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1270.pdf

Original ruling text

325.1270

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

October 1, 1982

--- --- ----- --- ----- --- --Attention:

Dear --- ---:
Your letter of August 12, 1982, to Mr. Don Hennessy has been referred to the undersigned for reply. Your inquiry concerned the significance of a foreign trade zone on the application of the California Sales and Use Tax Law. Foreign trade zones were established by an Act of Congress (48 U.S. Stats. at L., Ch. 590) in 1934 for the purpose of allowing foreign and domestic merchandise into a zone without the payment of duties or the furnishing of a bond for further processing or manipulation. The merchandise is subject to custom’s duties only when it actually enters the United States. The statutes providing for the foreign trade zones are found in section 81 a et seq., of Title 19 of the United States Code. We have broken down the subject matter into several questions, our answers to which follow.

1. Does tax apply to sales of tangible personal property made from inside of a foreign trade
   zone?
   a. and delivered to a purchaser in California?
   b. and delivered to a purchaser outside California?
   Answer:

a. A sale made from a retailer inside a foreign trade zone to a purchaser in California would be subject to tax in the same manner as other sales of tangible personal property delivered to California purchasers. b. A sale made from inside the foreign trade zone and shipped to a point outside California by means of facilities hired by the retailer to a carrier, customs broker or forwarding agent would not be subject to tax. Such a sale would be treated like any other sale in interstate or foreign commerce.

--- --- ---

-2-

October 1, 1983
325.1270

2. Does sales tax apply to sales of tangible personal property by a California retailer
   delivered into a foreign trade zone in California?
   Answer:

Sales tax would apply to sales of tangible personal property delivered into a foreign trade zone located in California.

3. Does use tax apply to tangible personal property:
   a. delivered from outside [the] United States to a foreign trade zone in California or b. to tangible personal property delivered from another state into a foreign trade zone in California and used inside the foreign trade zone? Answer:

There is no provision under the California Sales and Use Tax Law which would exempt the use of tangible personal property inside a foreign trade zone from the imposition of use tax. We are aware of no authority under federal law which would prohibit the imposition of the California Use Tax in such an instance. We are, therefore, of the opinion that tax would apply to the use of tangible personal property within a foreign trade zone. Arguably, there might be some support for the contrary view on basis that in establishing the foreign trade zone Congress has preempted this entire area from state control and that any action on the part of the State of California which would lessen the competitive advantage conferred by Congress would be prohibited. See National distillers Products Corp. v. San Francisco Co., 141 Cal.App.2d 651 (1956).

We do note that under Revenue and Taxation Code Section 6009.1, use tax would not apply to tangible personal property which is brought into the foreign trade zone for the purpose of being processed, fabricated, or manufactured into, attached to or incorporated into other tangible personal property to be transported outside the State and thereafter used solely outside the state. We trust that the above will answer your questions concerning the correct application of the sales and use tax to transactions involving foreign trade zones. If you have further questions please write this office. Very truly yours,

Mary C. Armstrong
Staff Counsel
MCA:jlc