Were West German fighter-aircraft transponders exempt when its dependent California office held them for up to a week before transshipment?

Plain-English summary

The claimant was an independent division of a diversified electronic-equipment corporation, separately permitted from April 1, 1986. Its April 1986–December 1987 protested liability was measured by $865,822 in disallowed export sales of transponders and related equipment to West Germany for fighter-aircraft use.

Export licenses prohibited United States sale or use; copies were placed in the absent petition file. The claimant delivered to the German Military Representative's Sun Valley facilities, where property was consolidated and held up to one week before GMR transshipment to West Germany.

At the December 6 Sacramento conference, two claimant representatives and a senior tax auditor appeared. The claimant asserted statutory forwarding-agent and federal constitutional export grounds.

A February 1989 German legal-adviser letter supplementing a January telefax called Sun Valley a dependent GMR branch, not a separate entity, and said Dulles Airport's GMR was the freight forwarder delegating duties there.

Section 6387 did not apply. Its receiving export packer/forwarder had to be at least a separate legal entity in the export business. The three quoted letter rulings distinguished a real forwarding business, a purchaser that also packed, and a separate purchaser-created packer. Sun Valley was merely the purchaser's representative performing transshipment.

The constitutional exclusion also failed. At title passage on Sun Valley delivery, the goods came to rest and had not begun continuous foreign movement. A legal United States-use prohibition and export intent did not replace actual movement.

Farmers' Rice, Montrose and Kosydar supplied that movement rule, though the PDF contains malformed reporters. Empresa illustrated it: when 12% of a dismantled California cement plant had shipped, the remaining 88%—including 10% already crated—could be taxed because it had not begun the foreign voyage. The PDF calls the buyer and destination “Columbian” and “Columbia” and prints 1948; the reporter resolves to a 1949 decision.

The recommendation was to deny the refund. No final Board action or later outcome is supplied.

The live annotation publishes only the general purchaser-representative/consolidation rule and omits the German military facts, statutory issue, evidence, amount and procedural posture.

Common questions

Why was Sun Valley not a forwarding agent or export packer?

It was a dependent part of the purchaser's GMR, not a separate legal entity in the export business. Dulles was said to delegate its freight-forwarding duties there.

Did the export license make the goods exempt?

No. Prohibiting United States sale or use did not replace the requirement that actual export movement begin at the taxable event.

Why did the one-week consolidation matter?

Title passed while goods came to rest at the purchaser's California representative before GMR transshipment, so the continuous foreign journey had not begun.

What did the cement-plant comparison show?

Intent, licenses, title and even crating were insufficient for the unshipped 88%; actual movement had to begin.

Was $865,822 the refund amount?

The source says protested tax liability was “measured by” $865,822 in disallowed export sales. It does not state that amount as the tax or refund itself.

Was the refund finally denied?

The source only recommends denial. It supplies no adopted Board decision, payment, refund result or appeal.

Citations and references

• U.S. Const. art. I, § 10; Cal. Rev. & Tax. Code § 6387; Regulation 1620(a)(3)(B), (a)(3)(C)(2)
• Letter Rulings 325.1480, 325.1500 and 325.1510 — quoted forwarding/packing distinctions
• Farmers' Rice, 14 Cal.3d 616; Montrose, source 243 Cal.App.3d 300; Kosydar, 417 U.S. 62 — movement cases
• Empresa Siderurgica, 337 U.S. 154 — source date/geography defects disclosed
• January telefax, February letter and license copies — identified but not fully reproduced
• Official Annotation 325.1475 — publishes only the general consolidation result

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1475
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1475.pdf

Original ruling text

STATE OF CALIFORNIA

325.1475

BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Claim
for Refund Under the Sales
and Use Tax Law of:
T--- I---, INC.

Claimant

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DECISION AND RECOMMENDATION

SR -- XX-XXXXXX-001

The Appeals Conference in the above-referenced matter was held on December 6, 1991, by Senior Staff Counsel W. E. Burkett in Sacramento, California Appearing for Claimant:

Mr. J--- A C--Manager, General Accounting
Mr. R--- R. L--President
Pacific Tax Associates

Appearing for the
Sales and Use Tax Department:

Mr. Robert Wils
Senior Tax Auditor
Protested Item

The protested tax liability for the period April 1, 1986 through December 31, 1987 is measured by: State, Local and County

Item
Disallowed export sales.

$865,822
Contentions of Claimant

1.
The sales are exempt by reason of delivery to a forwarding agent under Revenue and Taxation Code Section 6387. 2.

The sales qualify as exempt exports under the Federal constitution.

T--- I---, Inc.
SR AR XX-XXXXXX-001

-2-

December 30, 1991
325.1475

Summary
The claimant is an independent division of a diversified corporation that engages in the manufacture and sale of electronic equipment. This operating division was separately permitted for sales and use tax purposes on April 1, 1986. The protested tax deficiency is measured by the sales price of certain transponders and related equipment sold to the Federal Republic of West Germany for use on fighter aircraft. The items were claimed to be exempt as exports under Article I, Section 10 of the Federal constitution. (Import-Export Clause.) The items were sold pursuant to a license obtained by claimant which prohibited sale or use of the subject property in the United States. Copies of the licenses have been placed in the petition file. The items were delivered by the claimant to facilities maintained by the German Military Representative (GMR) in Sun Valley, California. They were consolidated and held for periods of up to one week at which time they were transshipped to the Federal Republic of West Germany by the GMR. Claimant contends that the export journey had begun at the time title passed upon delivery to the GMR, and that the application of the tax was prohibited under the export clause of the Federal constitution. The Board contends that, notwithstanding the license to export obtained by the claimant, the actual delivery of goods to the purchaser, occurred in California and that the tax was applicable because exportation did not occur until such time as the property was transshipped by the GMR. The claimant has also submitted that the GMR functioned as an export packer or freight forwarder and that an exemption should also be available under the provisions of Revenue and Taxation Code Section 6387. In support of this contention, it has submitted a copy of a letter to claimant from Guenther Mantell, a legal advisor for the Federal Republic of West Germany dated February 8, 1989, which provides in pertinent part as follows: “In completion of my telefax dated January 26, 1989 I would herewith like to assure you that our Representative in Sun Valley is a branch office of the German Military Representative USA/CA at Dulles Airport, VA., that means it is a dependent part of the GMR and not a separate legal entity. Freight-forwarder is the GMR Dulles, VA., which has delegated its duties to its Sun Valley office.” Analysis and Conclusions We first consider the statutory exemption granted under the following quoted provision of Revenue and Taxation Code Section 6387:

T--- I---, Inc.
SR -- XX-XXXXXX-001

-3-

December 30, 1991
325.1475

“6387. Delivery to export packers. There are exempted from the computation of the amount of the sales tax the gross receipts from sales of tangible personal property purchased for use solely outside this State and delivered to a forwarding agent, export packer, or other person engaged in the business of preparing goods for export or arranging for their exportation, and actually delivered to a port outside the continental limits of the United States prior to making any use thereof.” This section is implemented by the provisions of Sales and Use Tax Regulation 1620, Paragraph (a)(3)(B) which provides the following relevant definition of a forwarding agent: “…term ‘forwarding agent’ means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm not otherwise so engaged does not become a ‘carrier’ or ‘forwarding agent’ within the meaning of this regulation simply be being designated by a purchaser to receive and ship goods to a point outside this state.” We are also aided in our determination by the following letter rulings relating to forwarding agents and export packers: “325.1480 Definition of a Forwarding Agent. A ‘forwarding agent’ includes only such persons or firms as are engaged in the business of arranging for the shipment of goods. Those concerns that are in the business of consolidating shipments into carload lots and performing other services in connection with the shipment of goods would constitute forwarding agents. A person who is an agent of a buyer and takes delivery of the goods in this state on behalf of the buyer is not a ‘forwarding agent’ even though he arranges for the transportation of the goods. “It sometimes happens that the purchaser will direct the seller to deliver the goods to some third party in this state not in the business of arranging for the shipment of goods but in some other business, and the goods are delivered to him simply to be further processed or incorporated with other goods sold by such persons. In this case, there has not been a delivery to a ‘forwarding agent’. “325.1500 Export Packer Also a Purchaser. Sales of trucks to be exported by the purchaser who is also an export packer and who takes delivery of the trucks in the state for the sole purpose of packing and crating the trucks for shipment overseas are not exempt from tax by virtue of Section 6387. 9/27/68.

T--- I---, Inc.
SR -- XX-XXXXXX-001

-4-

December 30, 1991
325.1475

“325.1510 Export Packers. Sales to a foreign purchaser, where delivery is made in California to a separate legal entity set up by the foreign purchaser to act as an export packer, will qualify as exempt within Section 6387, provided the other requirements of that section are satisfied. To be considered an export packer within Section 6387 and Regulation 1620(a)(3)(C)(1)(b), it is not necessary for a firm to hold itself out to the public as an export packer. It is sufficient if the purchaser and the packer are separate legal entities and the packer is engaged in the business of export packing for the purchaser.” The above-cited regulation and rulings make it clear that in order for the exemption to attach under Section 6387, the person receiving the goods must at the very least be a separate legal entity engaged in the business of preparing goods for exportation or arranging for their transportation. The underlying theory is that this is sufficient to set them apart from the mass of goods in this state and yet preclude the completion of delivery of the goods to the purchaser prior to export. In this instance the recipient of the goods is not a separate legal entity engaged in the business of exporting but merely a representative of the purchaser assigned to perform the transshipping service. We therefore conclude that the claimant is not entitled to exemption under Revenue and Taxation Code Section 6387. It is also our conclusion that the claimant’s sales are not entitled to the constitutional exemption as exports. This requires that the goods be irrevocably committed to export at the time of sale (delivery to GMR in this case) and that the goods be moved upon a continuous journey to the foreign destination. (Sales and Use Tax Regulation 1620(a)(3)(C)(2).) While there are prior appellate cases that have held that a prohibition on use of the goods in this state is sufficient to set the goods apart, it has been held that this is not sufficient to classify the goods as exempt exports unless the movement of the goods has begun at the time the taxable event occurred. (See Farmer’s Rice Cooperative v. County of Yolo, 14 Ca.3d 616 disapproving prior ruling in decision of Montrose Chemical Corp. of America v. County of Los Angeles, 243 Cal.App.3d 300. Also see Kosydar v. National Cash Register Co., 417 U.S.62.) In this case the tax id applicable because at the time of passage of title upon delivery in Sun Valley, the property had come to rest in this state and had not begun its export journey to Germany. This principal is amply demonstrated by the underlying facts in Empresa Siderurgica v. County of Merced, [1948] 337 U.S. 154. That case involved a California cement plant, which had been sold to a Columbian buyer. Title to the property had passed to the buyer and a common carrier had begun to dismantle the plant and crate it for shipment to Columbia.

T--- I---, Inc.
SR -- XX-XXXXXX-001

-5-

December 30, 1991
325.1475

At a state when 12% of the plant had been shipped out of the country, the county of Merced levied a personal property tax on the remaining 88%. This balance included about 10% of the original plant that had been dismantled and crated or prepared for shipment, but which had not yet begun its voyage to Columbia. This Court held that the tax on the 88%, including the crated portion, did not violate the Import-Export Clause. Adhering to the test announced, the Court concluded that intent to export is not sufficient. It held that actual movement must have begun at the time the taxable event occurred. Otherwise the constitutional exemption is not applicable. Recommendation It is recommended that the claim for refund be denied.

12-30-91

W. E. BURKETT, SENIOR STAFF COUNSEL

Date