Did goods qualify for export when the purchaser controlled its trucks for two days before forwarding-agent delivery, despite later Mexico export?

Plain-English summary

Return Review asked how to test a sales transaction for export exclusion. A September 24, 1991 bill of lading named Mexico as destination but showed purchaser-provided transportation. A shipper's export declaration two days later named the purchaser as exporter.

A March 3, 1993 purchaser letter said the truck reached the Mexicali border with a retailer partner on the evening of September 26. That date originally read September 24 before someone changed it to 26. Counsel left date correctness unresolved because a different fact controlled.

The property was loaded onto purchaser-provided trucks. The purchaser had possession and control from initial delivery until forwarding-agent delivery two days later. A retailer partner or employee riding along did not alter that exclusive control.

The memorandum concluded the retailer had not irrevocably committed the property to export. Actual later purchaser export to Mexico was insufficient under Regulation 1620(a)(3)(C)1.

The constitutional and regulatory discussion supplied contrasts. Empresa required separation from the state's general property mass and a begun continuous journey. Richfield allowed California purchaser possession for bulk oil pumped into a tanker because diversion was implausible.

Gough required an export agreement, commitment from the transaction's start, actual movement when tax was imposed and an unbroken journey without independent-purpose delay. McDonnell Douglas found requisite certainty for aircraft parts moved by common carrier to an independent border forwarder for U.S. and Mexican customs processing.

No property description, complete documents, tax amount, audit result or later proceeding is supplied. The live annotation publishes only the purchaser-control outcome.

Common questions

Did a Mexico destination on the bill of lading prove exemption?

No. It also showed purchaser-provided transportation, and the purchaser controlled the goods before forwarding-agent delivery.

Did the retailer representative riding in the truck change control?

No. Counsel said a partner or employee's presence did not alter the purchaser's exclusive possession and control.

Why was the changed September date not resolved?

Whether the correct arrival date was September 24 or 26 mattered less than purchaser control from initial delivery until the forwarder.

When can purchaser-furnished transport still qualify?

The quoted regulation required the transport means and property character to provide certainty of foreign destination and no domestic diversion; Richfield's large-volume tanker loading was the example.

Was actual delivery to Mexico enough?

No. Actual later export did not repair the absence of irrevocable commitment before purchaser possession and control.

Citations and references

• U.S. Const. art. I, § 10, cl. 2 — import/export prohibition as described
• Regulation 1620(a)(3)(C)1 and 2(c) — purchaser control and diversion-certainty rules
• Empressa Siderurgica, S. A. v. Merced, 337 U.S. 154, 156 — source name; reporter resolves to Empresa Siderurgica v. County of Merced
• Richfield Oil, 329 U.S. 69; Gough Industries, 51 Cal.2d 746, 749; McDonnell Douglas, 10 Cal.App.4th 1413 — verified reporters
• Three dated shipment documents — described but not reproduced
• Official Annotation 325.1375 — publishes the purchaser-control result

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1375
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1375.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

325.1375

Memorandum
To

:

Ms. Kelli Ochoa
Return Review Section - MIC:35

From :

Donald L. Fillman
Tax Counsel

Subject:

U--- P--- E--SR -- XX-XXXXXX

Date:

July 7, 1993

This is in response to your memo of April 16, 1993 concerning the criteria used to determine whether a sales transaction qualifies for the export exclusion. The U. S. Constitution in Article 1, § 10 cl. 2 prohibits state and local taxation of imports and exports. The U. S. Supreme Court has held that it is acceptable to tax property that may be exported in the future, the same as property not to be exported, so long as the property to be exported has not yet been separated from the "general mass of property in the State." Empressa Siderurgica, S. A. v. Merced (1949) 337 U. S. 154, 156. This same case attempted to define when property left the general mass of property, and concluded that it was when it had "been started upon [its] transportation in a continuous route or journey." This language is the basis for Regulation 1620(a)(3)(C)2.(c): "Delivery by the retailer of property into a facility furnished by the purchaser constitutes an irrevocable commitment of the property into the exportation process only in those instances where the means of transportation and character of the property shipped provide certainty that the property is headed for its foreign destination and will not be diverted for domestic use." The case of Richfield Oil Corp. v. State Board of Equalization (1946) 329 U.S. 69 is the standard example of when the means of transportation and character of the property allow the export exemption to apply even when the purchaser takes possession within California. The pumping of a large quantity of oil into a tanker berthed in a California port does not lend itself to diversion. The California Supreme Court has created a four-part test in Gough Industries v. State Board of Equalization (1959) 51 Cal.2d 746, 749:

Ms. Kelli Ochoa

-2-

July 7, 1993
325.1375

"(a) The agreement of sale contemplated shipment of the goods in export, that is, from a seller in the United States to a buyer in a foreign country; (b) from the beginning of the transaction, the goods were committed to go all the way to the foreign country; (c) the movement of the goods had actually started when the tax was sought to be imposed; and (d) the journey was continuous and unbroken by any action or delay taken for a purpose independent of the transportation of the goods." In the recent case of McDonnell Douglas Corporation v. State Board of Equalization (1992) 10 Cal.App.4th 1413, the appellate court applied this four-part test to a transaction where the property was shipped by common carrier to a location on the U.S./Mexican border where an independent freight forwarder, with the assistance of the purchaser's employees, processed the property through U.S. and Mexican customs. Here the type of property (aircraft parts) and means of transportation (common carrier and independent freight forwarder) provided the requisite certainty of exportation. In your fact situation, the Bill of Lading dated September 24, 1991, shows the intended destination to be Mexico, but clearly shows that the transportation is provided by the purchaser. The Shipper's Export Declaration, dated September 26, 1991 (two days later) shows the exporter to be the purchaser. The March 3, 1993 letter from the purchaser states that "the truck arrived on the Mexican border--of Mexicali accompanied by your partner E--- T--- on the--evening of September 26, 1991." However, this date had originally been typed "September 24, 1991" but someone had changed it to "26." Whether the dates are correct or not is of less concern than the fact that the taxpayer did not commit the property irrevocably to the export process. The property was loaded onto trucks provided by the purchaser, and the purchaser had possession and control from initial delivery until the property got to the forwarding agent two days later. The fact that a partner or employee of the retailer rode in the truck does not affect the fact that the purchaser had exclusive possession and control well before the property reached a forwarding agent. The fact that the purchaser in fact exported the property is insufficient to qualify the taxpayer for the export exemption. See Reg. 1620(a)(3)(C)1.

DLF:cl

cc:

Arcadia District Administrator