Did use tax apply to catalyst-process waste burned or buried in California, or to a byproduct inventory held for intended Texas use before disposal?

Plain-English summary

Robert Nunes's July 10, 1972 memorandum raised a problem in a redacted taxpayer's current audit. The Board responded initially on July 21, then Gary Jugum and Don Hennessy met two taxpayer representatives on November 2 with auditor Norman J. Colombo. None of those records is supplied.

The taxpayer described this catalyst process:

• Aluminum phosphide and water liberated phosphine gas and left aluminum trioxide as waste.
• Phosphine combined with a material printed first as Cycloctadein (RC O8), producing desired RC 78H and waste RC 716. The source later calls the input RC OS without resolving the character change.
• RC 716 and unreacted phosphine and RC OS were burned.
• Eicosene-1 (RC 020) combined with RC 78H to make final catalyst RM 17.
• Unreacted raw-material portions were burned as waste; the holding also mentions material burned or buried.

Counsel applied section 6009.1 because the valuable, desired raw-material element would be transported and used solely outside California. The waste portion therefore was not taxable. Colombo's field examination also found the burned waste served only mere disposal, with no separate use-tax-producing purpose.

The meeting raised a second issue. RC 716 had once been shipped to and used at the taxpayer's Texas plant. When that use stopped, approximately 123,880 pounds remained at the California plant and was later burned as waste.

Section 6009.1 excluded storage when property was retained to be transported and used solely outside California. Counsel said tax would not have applied had the inventory gone to Texas, and later deciding it was waste did not create tax merely from the prior holding. An otherwise-unproduced Annotation 570.1380 was cited for comparison.

No audit adjustment or final outcome is supplied. The live annotation publishes only the general processing-waste conclusion and omits the separate inventory issue.

Common questions

Why was the burned or buried processing material not taxed?

The useful element became RM 17 for solely outside-California use, while the remaining material was waste. The field finding said burning served only disposal.

Did all burning automatically avoid use tax?

No broad rule is stated. The conclusion depended on the represented process, solely outside use of the desired element and a field determination of no purpose beyond disposal.

What happened to RC 716?

It had previously gone to a Texas plant. After that use ended, about 123,880 pounds remained in California and was eventually burned as waste.

Did holding that inventory in California trigger tax?

Not according to counsel, because it was held for intended Texas transport and solely outside use. The later disposal decision did not retroactively change that purpose.

Were the chemical labels completely clear?

No. The official text prints RC O8 in the process description and later RC OS, without explaining whether they are the same label or an extraction/source defect.

Did the memo close the audit?

No. It provides opinions on two issues but no workpapers, adjustment, assessment, payment, appeal or final result.

Citations and references

• California Revenue and Taxation Code section 6009.1 — processed-material and storage exclusions
• California Tax Service Annotation 570.1380 (October 23, 1964) — cited comparison without source
• July 10 and July 21 memoranda; November 2 meeting — identified, not reproduced
• Norman J. Colombo field examination — disposal-only finding without field record
• 123,880-pound RC 716 inventory — described without inventory or disposition records
• Official Annotation 325.1732 — publishes only the first waste-material holding

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.1732
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-1732.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Robert Nunes

From:

Gary J. Jugum

325.1732

Date:

November 8, 1972

Subject:

This is in further response to your memorandum of July 10, 1972, in which you raised a question encountered in the current audit of ---. We initially responded to you on July 21, 1972. As you are aware, on November 2, 1972, Don Hennessy and I met with --- and --- to discuss this problem. The audit staff was represented by Mr. Norman J. Colombo. The catalyst manufacturing process in question has been further described by ---s representatives. Roughly, the process is this: Aluminum phosphide is mixed with water to liberate phosphine gas. Following this reaction, aluminum trioxide is left over as waste. The phosphine gas is combined with Cycloctadein (RC O8). This produces RC 78H, the desired product, and RC 716, a waste item. The RC 716 is burned off. Portions of the phosphine gas and of RC OS which have not reacted are also burned off. Eicosene-l (RC 020) is combined with the RC 78H to form the final product, the catalyst RM 17. Those portions of the raw materials which do not react during processing are burned off as waste. We are of the opinion that use tax does not apply to that portion of the materials burned or buried as waste in the production of RM 17. We think the exemption of Section 6009.1 applies since the valuable and desired element of the raw materials will be transported outside this state and will thereafter be used solely outside this state. We note that it has been determined, upon field examination by Mr. Colombo, that the waste materials burned were burned for no purpose other than mere disposal. Thus their burning results in no use tax liability on that basis. Mr. Colombo raised one additional issue at our meeting of November 2. He pointed out that for a period of time the RC 716, one of the waste products, was actually shipped to, and used by, the --- Texas, plant of taxpayer. Later it was decided to discontinue this use, at which time there was on hand at the CA plant an inventory of approximately 123,880 pounds of this substance. --- advises us that this amount has now been burned off as waste. Mr. Colombo raised the question as to whether the holding-for-use in this

state of the RC 716 might give rise to a use tax liability. We are of the opinion that no tax liability was incurred as a result of this fact. Section 6009.1 provides that "storage" does not include the keeping, retaining, or exercising any right or power over tangible personal property for the purpose of subsequently transporting it outside the state for use thereafter solely outside the state. Tax would not have applied to the RC 716 if it had been shipped to taxpayer's --Texas, plant, and we do not think that tax applies merely because taxpayer subsequently determined that this substance was a waste substance. (Compare Cal. Tax Sere Anno. 570.1380, October 23, 1964.)

GJJ/ab