When did California treat a vehicle, vessel, or aircraft as first functionally used outside the state rather than in California?

Plain-English summary

An April 27, 1992 Don Hennessy memorandum reached Assistant Chief Counsel Gary Jugum through an April 30 transmittal. A Board hearing had raised Mr. Nunes's example: perhaps an empty cargo truck driven into California had no outside functional use until cargo was loaded. None of those materials is reproduced.

Tax counsel distinguished broad statutory “use” from narrower functional or basic use—the purpose for which property was designed. Mere ownership, transport, testing or storage generally was not enough. But storing property in a state for maintenance and repair and then installing it there could be functional use.

The cited authorities supplied these building blocks:

• Chicago Bridge described the use tax's complementary purpose and four conditions: the user bought tangible property, from a retailer, for California storage/use, and actually stored/used it here.
• American Airlines involved engines and propellers stored in Tulsa for 21–292 days, averaging 132, then installed in Los Angeles and later operated about 94% outside California. Installation committed them to their aircraft-operating function in California.
• Atchison was cautiously described as appearing to treat repair-part storage and permanent installation as functional use.
• Parfums-Carday, as the source prints the name, treated California assembly of displays into promotional prepacks as a purpose beyond mere transit.

Regulation 1620(b)(2)(B) addressed property used in interstate or foreign commerce before entry and continuously afterward. Staff read it to deny exemption when the first functional use occurred in California. Subsection (b)(3), added with (b)(2) on November 18, 1978, contained the historical 90-day/six-month framework. A 2004 source note warns of unspecified changes.

Section 6248 and Regulation 1610(e)(2) supplied a vehicle-specific 90-day framework, excluding California-shipment time from outside use. Two annotations then contrasted an empty truck seeking any payload or self-powered vessel seeking any lessee with entry to collect a specific payload or fulfill a specific lease.

The memorandum's four conclusions were:

• A bus, tractor-trailer, sightseeing boat, or other commercial carrier was first functionally used outside California when it took on passengers or cargo there. Driving or sailing it empty into California generally put first functional use here, unless it was coming to fulfill an existing lease or charter or to collect a specific load or passenger group.
• A passenger vehicle, small motorboat, small plane, or other craft designed for personal use was functionally used outside California on its first trip or flight into the state, regardless of who operated it or whether it carried passengers or cargo.
• Property designed for another commercial purpose was not functionally used until that purpose occurred; for example, a commercial fishing boat was first used when used for fishing.
• If an item did not enter under its own power and had not otherwise been functionally used outside California, its first functional use was in California.

For commercial aircraft, counsel added that most purchases would be exempt under sections 6366 or 6366.1, without giving the conditions. The live annotation publishes only the four concluding tests and omits every authority, example, historical timing rule and later editorial warning.

Common questions

Was any ownership activity a functional use?

No. Functional use was narrower than statutory use and required commitment to the designed purpose, although repair/maintenance storage followed by installation could qualify.

When did an empty commercial carrier first function?

Usually when it first loaded passengers or cargo. Empty entry into California counted here unless it served an existing lease/charter or a specific cargo or passenger assignment.

Was the inbound trip functional use for personal craft?

Yes. For passenger vehicles, small motorboats and small planes, the first trip or flight into California counted outside California regardless of operator or load.

When was a commercial fishing boat functionally used?

When it was used on waters for fishing, the commercial purpose for which it was designed.

What if the property was carried into California?

If it did not enter under its own power and had no other outside functional use, the memorandum placed first functional use in California.

Did more than 90 days outside California always prevent tax?

No. The memo said California first functional use remained taxable even if purchase occurred more than 90 days before entry. The historical presumptions also had shipment-time and six-month-use details.

Are the quoted Regulation 1620 rules current?

The PDF itself says subsection (b)(3) changed by June 5, 2004 but does not identify the changes. This page does not apply the 1992 text as current law.

Did this memo decide a particular assessment?

No taxpayer, property, purchase, entry, use ratio, tax amount or final Board action is supplied.

Citations and references

• California Revenue and Taxation Code sections 6009, 6009.1, 6201, 6248, 6366 and 6366.1 — use, presumption and aircraft provisions
• California Vehicle Code section 465 — passenger-vehicle definition
• Regulations 1610(e)(2), 1620(b)(2)(B) and 1620(b)(3) — vehicle timing and functional-use framework
• Chicago Bridge & Iron Co. v. Johnson (1941), 19 Cal.2d 162 — use-tax purpose and elements
• American Airlines, Inc. v. State Board of Equalization (1963), 216 Cal.App.2d 180 — installation as functional commitment
• The Atchison, Topeka and Santa Fe Railway Company v. State Board of Equalization (1955), 131 Cal.App.2d 677 — repair parts
• Parfums-Carday, Inc. v. State Board of Equalization (1986), 187 Cal.App.3d 630 — name as printed; purpose beyond transit
• California Tax Service Annotations 570.0430 and 570.0510 — specific payload/lease examples
• April 1992 memoranda and Board-hearing discussion — described, not reproduced
• SPJ 6/5/04 notes — unidentified Regulation 1620 changes and deletion of Annotation 570.0430
• Official Annotation 325.1727 — publishes only the four concluding tests

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1727
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1727.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Gary Jugum :
Assistant Chief Counsel

From:

Elizabeth Abreu
Tax Counsel

Subject:

First Functional Use Test

325.1727

Date:

August 10, 1992

(916) 324-8208
By memorandum dated April 30, 1992, you transmitted Don Hennessy's April 27, 1992 memorandum requesting our position on the first functional use test as it applies to vehicles, vessels, and aircraft. The issue was raised during a Board hearing in which Mr. Nunes discussed the possibility that, at least as to an item such as a cargo truck, the Department would not find a functional use until there was cargo on the truck, i.e., that the driving of a truck into California empty would not be a functional use outside of California. A. Functional Use Test - Statutory and Judicial Authorities Revenue and Taxation Code section 6201 imposes the use tax on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. The use tax complements the sales tax with the purpose of placing local retailers and their out-of-state competitors on an equal footing. The use tax prevents an unfair burden from being place upon the local retailer engaged solely in intrastate commerce as compared with the case where the property is purchased for use or storage in California and is used or stored in this state. Since property covered by the sales tax is exempt from use tax, all tangible personalty sold or utilized in California is taxed only once for the support of the state government. Chicago Bridge & Iron Co. v. Johnson (1941) 19 Cal.2d 162, 165-166. A purchase is not subject to use tax unless the following conditions are met: (1) the tangible personal property stored or used must be purchased by the storer or user; (2) the purchase must have been made from a retailer; (3) the property must have been purchased for use or storage in this state; and (4) the property must have been used or stored in this state. Chicago Bridge & Iron Co. v. Johnson (1941) 19 Cal.2d 162,167.

In American Airlines Inc. v. state Board of Equalization (1963) 216 Cal.App.2d 180, the court, in reaching its conclusion that use tax applied to the purchase of the property in issue, refers to the "basic or functional use" of such property. In this case American Airlines had purchased new engines and propellers outside of California and had taken delivery in Tulsa, Oklahoma. After storage in Tulsa lasting from 21 days to 292 days and averaging 132 days, the engines and propellers were shipped by truck or air to American's Los Angeles facilities where they were installed onto aircraft. After installation, the engines and propellers were used about 94 percent of the time outside of California. At the time the court decided American Airlines the Board had not issued Regulation 1620(b) (3). The court's opinion and this part of the regulation, however, are consistent if the court regarded the first functional use of the engines and propellers to be inside of California. Under the regulation, the engines and propellers which were stored in Tulsa over 90 days could only have been taxable under the 90-day, 6-month rule if their first functional use was inside of California. With respect to functional use, the court states: "The storage was preliminary to the ultimate functional use of the items and under the statutory definitions and the interpretations put thereon all of the items were purchased for storage and use in California." (216 C.A. 2d at 191)
…
"There can be no doubt that American purchased the items with which we are concerned for a purpose which contemplated that American would exercise right and power over the items as an incident of ownership, namely among other things that the items would be stored and installed in this state. The functional purpose of the items was to make the aircraft operational and the property was purchased and brought into this state for such purpose and committed in California to such purpose." (216 C.A.2d at 192)
…
“Furthermore, it appears that respondent repeatedly has ruled that if tangible personal property was committed to its functional or basic use in this state by way of installation or otherwise, it was subject to the use tax, even though the taxpayers may have exercised some power out of state after its purchase out of state, including testing or integrating into· other personal property.” (216 C.A.2d at 193) In The Atchison. Topeka and Santa Fe Railway Company v. State Board of Equalization (1955).131 Cal.App.2d 677 the court appears to be holding that storing parts which are maintained for repairs and installing them permanently to equipment is a functional use of such property. In Parfums-Carday, Inc. v. State Board of Equalization (1986) 187 Cal.App.3d 630 Max Factor sold "promotional prepacks" which consisted of a counter or promotional display and an assortment of cosmetic merchandise. Max Factor purchased the displays under a resale certificate, stored the displays in a warehouse, assembled them into prepacks, and then shipped them to its customers. The court, in holding that section 6009.1 did not apply, held that if

property has some "functional purpose” in California other than to serve as a mere object in transit, there is a taxable use. B. Functional Use Test - Purpose and Application Regulation 1620(b) (3) specifically defines functional use, the term under consideration in this memorandum. This definition is "use for the purposes for which the property was designed.” The definition of "use" in Revenue and Taxation Code section 6009 includes lithe exercise of any right or power over tangible personal property incident to the ownership of that property ..." It is evident from the cases discussed above and these definitions that functional use has a narrower meaning than use. Functional or basic use is something more than exercising mere ownership rights or transporting, testing, or storing the property. However, storing property within a state for maintenance and repairs and subsequently installing the property in that state is a functional use. The functional use test is used in several regulations to determine if out-of-state purchases of property are subject to use tax. On November 18, 1978, the Board expressly incorporated the functional use test into the regulations by adding subsection (b) (2) and (3) to Regulation 1620. Regulation 1620(b) (2) (B) reads: "Use tax does not apply to property purchased for use and used in interstate or foreign commerce prior to its entry into this state, and thereafter used continuously in interstate or foreign commerce both within and without California and not exclusively in California." Although this regulation only implies, rather than specifically states, that the interstate commerce exemption cannot apply where property is first functionally used in California, the Board's staff has concluded that if a vehicle is first used in California without any prior functional use outside of the state, it is presumed that it was purchased for use in California and use tax applies even though used in interstate commerce. Regulation 1620(b) (3) reads: "Property purchased outside of California which " is brought into California is regarded as having been purchased for use in this state if the first functional use of the property is in California. When the property is first functionally used outside of California, the property will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, unless the property is used or stored outside of California one-half or more of the time during the six month period immediately following its entry into this state. Prior out-of-state use not exceeding 90 days from the date of purchase to the date of entry into California is of a temporary nature and is not proof of an intent that the property was purchased for use elsewhere. Prior out-of-state use in excess of 90 days from the date of purchase to the date of entry into California, exclusive of any time of shipment to California, or time of storage for shipment to

California, will be accepted as proof of an intent that the property was not purchased for use in California."
Note: some changes to Reg 1620 (b) (3). SPJ 6/5/04
Thus; under this part of the regulation, if property is first functionally used inside of California, it is taxable even though purchased more than 90 days prior to entry into this state. Revenue and Taxation Code section 6248 provides that there shall be a rebuttable presumption that any vehicle subject to registration which is bought outside of California and brought into California within 90 days from the date of its purchase is acquired for storage, use, or other consumption in this state. Regulation 1610(e) (2) reads, in part: "… Prior out-of-state use in excess of 90 days from the date of purchase to the date of entry into California, exclusive of any time of shipment to California, or time of storage for shipment to California, will be accepted as proof of an intent that the vehicle was not purchased for use in California. Accordingly, when a vehicle is purchased in a foreign country or in another state and is later shipped to California, the period of use for purposes of the 90-day test will be measured by the interval from the time the purchaser takes possession at the out-of-state point to the time when the vehicle is delivered to a shipping agent or placed in storage for shipment to California." Although this regulation does not specifically refer to the functional use test, it implies that a vehicle must be first functionally used elsewhere since the 90-day test period excludes time of storage. Annotation 570.0430 (1/7/74, 3/23/84), relating to vehicles purchased for use in interstate commerce, gives the following example of the functional use of vehicles: "… [I]f the only use of a truck outside of California were to drive it empty into California to pick up any payload it could find, the first functional use would be in California. However, if it were dispatched to California to pick up a specific payload, the first functional use would be outside of California."
Note: 570.0430 annotation now deleted SPJ 6/5/04
Annotation 570.0510 (4/7/78) gives a similar example, as follows: "If a lessor of a vessel were to transport the vessel by its own power into California in order to lease it to any lessee he could find, the first functional use would be in California. However, if the vessel were transported by its own power into California in order to fulfill delivery to a specific lessee, the first functional use would be outside California.” Based on the foregoing, I conclude that if a vehicle or vessel is designed for commercial carriage, e.g., a bus, a tractor-trailer, or a sightseeing boat, the first functional use will be outside of California if passengers are boarded or cargo is loaded onto the vehicle or vessel outside of

California. If such a vehicle or vessel is deadheaded into California, the first functional use will be in California unless the vehicle or vessel is brought to California to fulfill an existing lease or charter or to pick up a specific load of cargo or group of passengers. The same applies to aircraft though in most instances the purchases of such aircraft will be exempt under Revenue and Taxation Code section 6366 or 6366.1. With respect to vehicles, vessels, and aircraft designed for personal use, such as a passenger vehicle as defined in Vehicle Code section 465, a small motor boat, or a small plane, the first trip or flight into California is a functional use outside of California without regard to who drives or pilots the vehicle, vessel, or aircraft or to whether it is carrying passengers or cargo. Vehicles, ·vessels, and aircraft which are designed for commercial purposes are not functionally used until used for the commercial purpose for which they were designed. For example, a commercial fishing boat is not functionally used until it is used on waters for fishing. Finally, regardless of what purpose the vehicle, vessel, or aircraft was designed for, the first functional use of such items will be in California if they are not brought into California under their own power and they have not otherwise been functionally used outside of California.