Did three-day to occasional three-week California consolidation and economical repacking interrupt a foreign purchaser's export journey?

Plain-English summary

A foreign company bought many California-vendor items for export to a redacted country, while a New York entity paid for them. Nearly all items went to a California consolidator for repacking into economical units exceeding the 60-pound minimum airfreight weight.

Items ordinarily moved by “United Parcel.” The consolidator did not open packages or have authority to reject them for quality. A redacted package/invoice step preceded proper repacking. Average retention was three days and occasional retention three weeks.

Typical purchase orders contained a Sun Valley ship-to line, an “Aeroport du Bourgot” sold-to line, two-month-or-sooner delivery, receipt-time certificate-of-conformance request, domestic packing and a redacted payer. Some invoices carried a United States license/foreign-destination/no-diversion notice; others only identified sale and shipment parties.

After accumulation, one redacted entity billed packing and prepaid inland freight, and another invoiced the entire shipment. A delivery service moved repacked goods onward, followed by air carriage to the foreign country. The air waybill named redacted shipper and consignee. Each item was intended for and actually exported abroad.

The consolidator served only that foreign customer for this service and also made some direct sales to it. The live annotation says the foreign company owned property while the California company possessed it; the PDF's ownership sentence is redacted.

Coe and Richfield supplied the general-mass and continuous-journey test. Gough required a contemplated through-export agreement, commitment from transaction start, begun movement when tax was imposed, and no independent-purpose action or delay.

Tax counsel concluded vendor-to-consolidator movement was part of foreign commerce because every party knew and contemplated through shipment. Packing and consolidation were incidental to the total export journey, not an independent local purpose. The vendor sales were exempt exports.

The live annotation changes the final transport description to delivery service-to-airport-to-air-carrier. The PDF says delivery to ABC's facilities and then air carriage by ABC. The redactions do not permit reconciliation.

No complete transaction file, tax amount, filing, audit or later proceeding is supplied.

Common questions

Why was California consolidation only incidental?

It repacked unopened goods into economical airfreight units for a preplanned through-export, without quality inspection or an independent local purpose.

How long did goods remain?

The average was three days, occasionally three weeks. Counsel still treated the stays as part of the continuous journey on the described facts.

Did the consolidator decide whether goods met quality standards?

No. It did not open packages and lacked authority to repack or reject an item because it failed quality standards.

What documents showed foreign intent?

Described orders included foreign-looking sold-to/delivery terms, while some invoices stated a licensed ultimate destination and prohibited diversion. The complete documents are absent.

Who carried goods from consolidation to export?

The sources differ. The live annotation says a delivery service took them to an airport for air-carrier export; the PDF says delivery to ABC facilities and then ABC air carriage.

Citations and references

• U.S. Const. art. I, § 10, cl. 2 — Import-Export Clause
• Coe v. Errol, 116 U.S. 517, 527; Richfield Oil Corp., 329 U.S. 69 — general-mass/continuous-journey test
• Gough Industries v. State Board of Equalization, 51 Cal.2d 746, 749 — four-part test and incidental-consolidation analogy
• Three February requests and typical shipment documents — described but not reproduced
• Official Annotation 325.1377 — publishes foreign ownership and a conflicting final transport path

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1377
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1377.pdf

Original ruling text

325.1377

STATE OF CALIFORNIA

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

May 26, 1969
--- --- ----- --- ----- --- --Attention:

Gentlemen:
On February 18, 1969, you first inquired of this office as to the application of the sales tax to sales made by various California vendors to ABCDEFGHIJKLM or ABC. In particular, you were concerned with those transactions where ABC purchased property for export, but where the property was delivered, prior to its ultimate removal to [a foreign country], to the California facilities of your client, --- --- --- for the purpose of being consolidated for shipment with other property similarly purchased by ABC for export. Your letters of February 18, February 21, and February 27, 1969, indicate that ABC purchases a considerable number of items in California for export to [a foreign country].
--- --- --- of New York pays for all items purchased by ABC. Nearly all of the items ordered by ABC are shipped to --- for the purpose of being repacked into more economical units. The repacking is done to save airfreight fees. There is a minimum freight charge up to 60 lbs., and
--- consolidates merchandise to exceed this minimum weight. The items in question are ordinarily sent to ---’s place of business by means of United Parcel. --- does not open any of the packages sent to it. It does not have authority to repack any item because of its failure to meet quality standards, so that any item sent to --- remains on its premises until it is xxxxxxxx with its invoice and until it can be property repacked. The average length of time an item remains with --- before shipment is three days. Occasionally, an item will remain for three weeks. The property is owned by --- while it is in the possession of xxxxxx. The documents which support a typical shipment indicate that --- issues its own purchase orders directly to its vendors. Typically, the purchase orders provide the following shipping and delivery instructions: SHIP TO

:

SOLD TO
DELIVERY
CONTROL

:
:
:

--- --- --Sun Valley
--- Aeroport du Bourgot
--- --2 months or sooner
Upon receipt – certificate of conformance requested

--- --- ---

-2-

PACKING
TERMS

:
:

May 26, 1969
325.1377

Domestic
Payment of this order will be made by ---

Some invoices indicate:
“These commodities licensed by the United States for ultimate destination ---. Diversion contrary to United States law prohibited.” Others indicate only that the property covered by the invoice is sold to --- with shipment to
--- ---.
Once the items have been accumulated at --- ---, --- --- issues an invoice to --- indicating a charge for packing and prepaid inland freight per enclosed documents. --- then issues an invoice covering the entire shipment indicating that the items are: “Sold to:

--- --- --- --- --- --- ----- --- --- --- --- --- ----- --- --- --- --- --- ---.”

From --- --- the repacked goods are taken by --- to the facilities of ABC. ABC in turn carries the goods by air from California to [a foreign country]. The air waybill indicates that the shipper is --- and that the consignee is --- ---. Each item in question is purchased by --- with the intent that the item will be removed to
[a foreign country] and each item is in fact ultimately exported to [a foreign country].
--- is the only customer for whom --- --- performs this consolidation service. --- makes some sales directly to --- ---. Article I, Section 10, Clause 2 of the United States Constitution provides that, “No state shall, without the consent of the Congress, lay any imposts or duties on…exports.” The United States Supreme Court has said that under the constitutional standard, “Goods do not cease to be part of the general mass of property in the state, subject, as such, to its jurisdiction and to taxation in the usual way, until they have been exported or entered with a common carrier for transportation to another state, or have been started upon such transportation in a continuous route or journey.” Coe v. Errol, 116 U.S. 517, 527. Although this test was fashioned to determine the validity under the commerce clause of a nondiscriminatory state tax, it was held in Richfield Oil Corp. v. State Board of Equalization, 329 U.S. 69, to be equally applicable to cases arising under the Import-Export Clause. In Gough Industries v. State Board of Equalization, 51 Cal.2d 746, the case which most nearly parallels the case at hand, a California manufacturer and seller sold goods to a foreign purchaser. The seller was informed that the purchases were made for export. The purchaser submitted orders requiring that the packages be marked with the name of the foreign port of

--- --- ---

-3-

May 26, 1969
325.1377

entry. The seller was instructed to deliver the goods to the purchaser in care of the purchaser’s export packer. Title to the goods passed to the purchaser when the goods were delivered to the packer. The packer packed the goods according to the purchaser’s specifications and forwarded them by truck carrier to an ocean carrier, which removed the goods to the foreign destination. The court concluded that “(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” [at page 749] and that, therefore, the sales in question were not subject to tax. In our opinion, the movement of the goods from the various vendors to --- for consolidation relating to the transportation of the goods to --- --- is not independent of the journey in foreign commerce where all of the parties know and contemplate that the shipments are to go through to [a foreign country]. The packing and consolidation done by --- --- is only, “…an incidental part of the total export journey rather than the primary station of commencing an export journey” [Gough at p. 749]. Accordingly, the sales in question are exempt from the tax as sales for export. Very truly yours,

T. P. Putnam
Tax Counsel
By_________
Gary J. Jugum
GJJ/ss
bc:

Hon. Richard Nevins
--- --- District – District Administrator
--- --- Subdistrict Administrator