Were ocean cargo containers exempt when manufactured in Mexico, delivered to a California lessor, filled here, and shipped abroad?

Plain-English summary

A seller bought materials in California, retained title while an affiliated Mexican facility manufactured ocean cargo containers, and sold the finished containers to a leasing company. The containers were delivered to a prearranged lessee in California, filled with freight here, and loaded onto ships with foreign destinations. The source reports departure within 30 days but contains an unresolved delivery-reference issue discussed below.

California rejected the section 6388.6 exemption because buying raw materials in California did not make the seller an in-state manufacturer; the containers themselves were manufactured in Mexico.

Reusable cargo containers were MTE, making the lessor their consumer. Because the lessee first filled them in California, their first functional use occurred here and the lessor was treated as purchasing them for California use. Use tax applied to purchase price unless the lessor timely elected FRV reporting, which would continue wherever the containers were located. The unidentified client could not claim statutory reliance protection.

Source details and limits

The December 6, 1991 letter responds to an October 24 request from an adviser whose client was not identified. It says staff do not issue rulings and denies section 6596 protection for this response because the parties were unidentified. The request, materials purchases, manufacturing, sales, leases and shipping records are not attached; no price, rent amount, actual election or later tax outcome is supplied.

X owned the Mexican maquiladora M and retained title to the California-acquired materials through manufacture. L already had a specific lessee when it bought the containers and instructed X to arrange direct delivery from M to L in California. The PDF then says the containers left California within 30 days “after the date of delivery to M,” although M is defined as the manufacturer in Mexico. The live annotation instead says delivery to the leasing company. Neither source supplies the underlying delivery records; this page does not substitute one reference for the other.

Section 6388.6 required more than prompt export: the source describes a purchase for use outside California, delivery in California by an in-state manufacturer, and removal within 30 days. California materials did not satisfy the manufacturing condition when assembly occurred in Mexico. The live summary additionally states that the sale occurred outside California and therefore was not subject to sales tax; the PDF's affirmative conclusion focuses on L's California use tax as consumer of leased MTE.

The PDF cites “Subdivision (b)(3) of Regulation 1628” and quotes four tests from Annotation 570.0430, dated January 7, 1974 and March 23, 1984. The printed regulation number is preserved. Under those historical tests, first California functional use supported tax. Where first use occurred outside California, entry within 90 days, the ensuing six-month pattern of use or storage, and continuous interstate use could change the result. Those branches did not protect these containers because the lessee first filled them in California.

The source discusses the alternative out-of-state-first-use branches conditionally; it does not establish a use log meeting them. It concludes that L owed use tax measured by purchase price unless it timely elected fair rental value under Regulation 1661. If elected, that measure applied whether the containers were inside or outside California.

The first-page annotation number is 335.0004.700, matching the live entry and official PDF link, while continuation headers print 330.0004.700. The signature block prints “David E. Levine” with initials “DHL.” These publication details remain unchanged rather than being normalized from other letters.

Common questions

Did export within 30 days establish the cargo-container exemption?

No. The exemption also required delivery by an in-state manufacturer, which the source found absent.

Did foreign manufacture keep the lessor outside California use tax?

No. First functional use occurred when the containers were filled in California.

Would fair-rental-value reporting end when the containers left California?

No. The letter says the elected measure applied while the containers were inside or outside California.

Does the PDF establish the correct 30-day delivery starting point for this shipment?

No. It says delivery to M, while the live summary says delivery to the leasing company; shipment records are not supplied.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6010(e)(4), 6023, 6388.6, and 6596
• Regulation 1628(b)(3), as printed — historical first-use discussion
• California Sales and Use Tax Regulation 1661
• Business Taxes Law Guide Annotation 570.0430

Verbatim support

From the official opinion:

Since your client is not identified, this opinion does not come within the provisions of section 6596.

Since X does not manufacture the containers in California, the section 6388.6 exemption does not apply.

If it makes such an election, tax applies to the fair rental value whether the property is inside or outside California.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/335-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/335-0004-700.pdf

Original ruling text

STATE OF CALIFORNIA

335.0004.700

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

December 6, 1991

Mr. E--- F. C--E--- & Y--XXX --- ---, Suite XXX
---, CA XXXXX
Dear Mr. C---:
This is in response to your letter dated October 24, 1991 which requests a ruling on the application of tax to the sale and use of certain cargo containers. Initially, I note that the staff does not issue rulings. Revenue and Taxation Code section 6596 provides the only basis for the Board to relieve a person of tax if that person has relied on incorrect advice from the Board. To come within the provisions of section 6596, the Board’s advice must be in writing in response to a written request for advice which discloses all relevant facts, including the identity of the parties. Since your client is not identified, this opinion does not come within the provisions of section 6596. Your client, X, owns a maquiladora facility, M, in Mexico which assembles oceangoing cargo containers for use in transporting freight in ships. X acquires tangible personal property in California to be incorporated into the containers by M and retains title to that property throughout the manufacture process by M in Mexico. X then sells the containers to a leasing company, L, and as instructed by L, directs M to send the containers directly to L in California. At the time L purchases the containers from X, L has already leased them to a specific lessee. Upon delivery to that lessee, the containers are filled with freight and then loaded onto ships having foreign destinations. The containers leave California within 30 days after the date of delivery to M. Revenue and Taxation Code section 6388.6 provides an exemption with respect to cargo containers, as defined therein, when the cargo container is purchased for use outside California, delivered by an instate manufacturer to the purchaser in this state, and is removed from California within 30 days after the date of delivery. X believes that it qualifies as an instate manufacturer within the meaning of section 6388.6 and is therefore entitled to the exemption. It appears that the argument that X is an instate manufacturer must be based on its acquisition of raw materials in California. However, a person who simply acquires raw materials in California and thereafter manufacturers property outside California is not an instate manufacturer within the meaning of section 6388.6 “Instate” modifies “manufacturer” in this provision, and the two terms may not be separated for purposes of qualifying for the exemption. That is, only a person who actually

Mr. E--- F. C---

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December 6, 1991
330.0004.700

manufacturers the property instate qualifies as an instate manufacturer. Since X does not manufacture the containers in California, the section 6388.6 exemption does not apply. X also believes that the sales in question qualify as exempt interstate commerce transactions since the containers are delivered to L from outside the state and, as soon as they are filled with freight, they leave the state for use exclusively in interstate and foreign commerce. Revenue and Taxation Code section 6023 defines mobile transportation equipment (MTE) to include reusable cargo shipping containers. Under subdivision (g)(4) of section 6006 and subdivision of (e)(4) of section 6010, the lease of MTE such as cargo containers for use in transportation of persons or property in excluded from the definition of “sale” and “purchase.” This means that a person purchasing MTE for such purposes is a consumer of that MTE. L is purchasing cargo containers which are MTE in order to lease that MTE for use in transportation of property. Therefore, L is the consumer of the cargo containers and X is making retail sales of those containers to L. If L purchases those containers for use in California, L’s use of the property is subject to use tax. Subdivision (b)(3) of Regulation 1628 explains when property is regarded as having been purchased for use in California. If the property is purchased outside California but is first functionally used in California, the property is regarded as having been purchased for use in this state. If the property is first functionally used outside California, the property is nevertheless 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 California one-half or more of the time during the six-month period immediately following its entry into California. This is explained further in Business Taxes Law Guide Annotation 570.0430 (1/7/74, 3/23/84). That annotation sets forth the following four tests to determine whether property purchased outside the state and used in interstate commerce is regarded as having been purchased for taxable use in California: 1. If first functionally used in California, it is presumed that the property was purchased for use in California and that use tax applies. 2. If the property is first functionally used outside California but comes into California within 90 days from the date of purchase, it is presumed that the property was purchased for use in California unless tests 3 or 4 call for a different result. 3. If the property is first functionally used outside California, brought into California within 90 days from the date of purchase, and then used more than one-half the next six-months inside California, it is presumed that the property was purchased for use in California and that the use tax applies unless test 4 calls for a different result.

Mr. E--- F. C---

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December 6, 1991
330.0004.700

4.
If the property is otherwise subject to tax under test 3, no tax will apply if the property is first functionally used in interstate commerce outside California, enters California in the course of such interstate use, and then is used continuously in interstate commerce while in California during a test period of the six-months after the property first enters California. The containers about which you inquire obviously enter California within 90 days of the date of purchase by L. Therefore, it is presumed that the property is purchased for use in California. If the containers are not regarded as being first functionally used by L in California, then it appears that either test 3 or test 4, or both, would be satisfied and the property would not be regarded as having been purchased for taxable use in California. Thus, the conclusion as to whether tax applies depends upon whether the property is first functionally used by L in California. If so, tax applies. As noted above, the cargo containers are MTE and L is regarded as the consumer. L purchases the cargo containers for lease to a lessee and first leases that property to the lessee in California. The lessee first uses the containers when they are filled in California. We conclude that the containers are first functionally used in California and that L is therefore regarded as purchasing the property for use in California. Use tax applies to that purchase measured by the purchase price of the containers unless L makes a timely election to pay its tax liability measured by fair rental value. (See Reg. 1661.) If it makes such an election, tax applies to the fair rental value whether the property is inside or outside California. If you have further questions, feel free to write again. Sincerely,

David E. Levine
Senior Tax Counsel

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0524E
bc: --- District Administrator