Were San Diego dock diesel sales exempt because foreign fishing vessels transported and burned the fuel outside United States territorial waters?

Plain-English summary

A seller supplied diesel at its San Diego dock to fishing boats based and registered in an unidentified foreign country. The boats used the fuel for propulsion during fishing operations, including use outside United States territorial waters.

The customers apparently contended that Ruling 55 exempted the sales as foreign commerce. Counsel stressed that every exemption condition required proper proof and that the rule covered goods delivered to a purchaser-furnished conveyance to carry them abroad and actually taken to a foreign destination.

The Board's assistant counsel concluded that these were not exempt foreign-commerce or export sales. Under the cited historical rule, the goods had to be delivered to a purchaser-furnished conveyance for the purpose of carrying the goods abroad. Here, the operators bought the diesel for use as vessel fuel, not as export cargo destined for a foreign country.

An absent Attorney General opinion was described as taxing Mexico-government naval fuel and rejecting a federal export-burden objection. Counsel reasoned that private foreign fishing-boat fuel likewise should be taxed.

The letter applied the issued Shell Oil decision. As described here, the California Supreme Court held bunker fuel used to propel a vessel was not an export under the Import-Export Clause and sales tax did not unconstitutionally tax the export process.

Counsel therefore agreed with the seller's assumption that sales tax applied. No sales, proof, tax computation, filing, audit or later outcome is supplied.

Common questions

Did foreign registration or ownership exempt the fuel?

No. The source identifies a foreign base and registration but turns on the fuel's purpose and destination, not those vessel attributes.

Why was the diesel not export cargo?

Operators bought it for refueling and propulsion during fishing operations, not to carry the diesel itself abroad as goods to a foreign destination.

Did later use outside territorial waters change the result?

No. Counsel expressly rejected exemption despite outside-state transport and fishing use outside United States territorial waters.

What proof did the historical rule demand?

Every exemption condition needed adequate proper proof, including purchaser-conveyance delivery for carrying goods abroad and actual carriage to a foreign destination.

What constitutional question did Shell Oil answer?

As the letter describes it, propulsion bunker fuel was not export under the Import-Export Clause, and taxing its sale did not unconstitutionally tax the export process.

Citations and references

• California Sales and Use Tax Ruling 55(a)(1)(E) — conveyance, purpose, destination and proof conditions
• Unidentified Attorney General letter opinion — described but not reproduced
• U.S. Constitution article I, § 10, clause 2 — Import-Export Clause
• Shell Oil Co. v. State Board of Equalization, 64 Cal. 2d 713 — propulsion-fuel and export-process holdings as described
• Official Annotation 325.1320 — publishes the fishing-use/export-cargo result

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1320
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1320.pdf

Original ruling text

325.1320

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

July 26, 1967

Gentlemen:
This is in reply to your letter of June 10, 1967 in which you ask our opinion with respect to the application of the California Sales and Use Tax Law to your sales of diesel fuel to foreign fishing boat owners. We understand that these fishing boats are based and registered in a foreign country. The diesel fuel which is sold by your firm is used to propel the vessels in their fishing operations. It is apparently your customers' contention that these sales of diesel fuel made at your San Diego dock are exempt from sales tax on the ground that they are sales in foreign commerce under sales and use tax Ruling 55. In order to claim exemption from sales tax upon the ground that the sales are immune from taxation as sales in foreign commerce or as export sales, it is essential that all of the conditions of such exemption be present and adequately supported by proper proof. Ruling 55 (a) (1) (E), copy enclosed, expressly provides as a condition of exemption that the goods shall be delivered to a conveyance furnished by the purchaser for the purpose of carrying the goods abroad and which, in fact, are actually carried to a foreign destination. Since your foreign purchaser (i.e., foreign boat operator) uses the purchased fuel in its fishing operations, it has not purchased goods for the express purpose of carrying them to a foreign destination. Thus, it is our opinion that sales of fuel to foreign fishing boat operators for purposes of refueling their vessels while engaged in fishing operations are not to be considered as sales of "export cargo" within the meaning of the aforementioned ruling, notwithstanding the fact that the foreign purchaser transports the goods outside the state and uses them in his fishing operations outside the United States territorial waters. In support of our position is a letter opinion from the Attorney General's office stating that the California sales tax applies to the sale of fuel oil to the government of Mexico for use in its naval vessels. The opinion also states, "… that such a tax would not become a burden on an act of exportation contrary to the federal Constitution." Thus, if tax applies to the sale of fuel oil to the Mexican government, undoubtedly it should also apply to the sale of fuel oil or other types of fuel to private foreign fishing boat operators who use the fuel in their fishing operations.

The question whether the California sales tax could constitutionally apply to sales of bunker fuel used to propel a vessel was answered in the affirmative in the recent California Supreme Court decision of Shell Oil Co. v. State Board of Equalization, 64 Cal. 2d 713. In that case, the court held that the bunker fuel used to propel a vessel was not an "export" within the meaning of the import-export clause of the United States Constitution. (U.S. Const., art. I, § 10, cl. 2.) The court also held that the application of the sales tax to these sales did not constitute an unconstitutional tax on the "process of exportation". In conclusion, we believe you are correct in assuming that the sales tax applies to your sales of fuel to your fishing boat owner customers. If you have further questions in connection with this matter, please do not hesitate to forward the same to this office for our reply.

Very truly yours,

Elliott D. McCarty
Assistant Counsel

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