Was a deburring service's furniture-and-fixture sale exempt when taxable material sales were under 1 percent of receipts?

Plain-English summary

An unidentified company polished and deburred metal parts for manufacturers that later assembled and sold the finished products. It held a seller's permit only to sell small quantities of deburring materials to very small customers; those taxable sales were under 1 percent of receipts.

The letter treated polishing exclusively for resellers as a service activity that did not itself require a seller's permit. On a sale of the company's furniture and fixtures, tax would apply only to property held or used in the incidental materials-selling activity.

Property used exclusively in polishing was exempt, provided the company served only resellers and did not make more than two substantial sales of polishing-activity property in a 12-month period. The letter expressly denied section 6596 reliance because the client was unidentified.

Request, assumptions, and record limits

Tax Counsel James E. Mahler answered a November 19, 1985 letter from J--- M--- of M--- C--- C---, Inc., who asked on behalf of an unidentified client about a proposed sale of furniture and fixtures. The source quotes the requester's factual description but does not include the request as a separate document.

The reported business polished and deburred metal objects supplied by manufacturers, returned the objects for assembly, and made taxable sales of small quantities of deburring materials to small customers. Those material sales represented less than 1 percent of gross receipts during the preceding 12 months. The letter did not treat that percentage alone as decisive; it separated property used in the selling activity from property used exclusively in the service activity.

Both exemption conditions were express assumptions, not verified findings. Legal staff assumed that the client worked exclusively for persons reselling the polished articles and not for consumers. It also assumed the client would make no more than two substantial sales of property used in polishing. If either assumption was wrong, the letter said the proposed furniture-and-fixture sale would not qualify as exempt.

The quoted Regulation 1595 provision gives examples of incidental sales by service enterprises and says more than two substantial service-property sales in 12 months can make the receipts taxable. It also says equipment trade-ins incidental to the service enterprise do not count and gives interstate commerce as an example of another exemption. The source cites Annotation 410.0340 for the reseller-only polishing premise but does not include that prior opinion.

The PDF does not identify the client or supply customer records, resale support, the seller's permit, sales ledgers, gross-receipts calculations, an asset list, use allocation, prior asset-sale history, trade-in records, sale agreement, price, closing documents, return, tax calculation or payment, audit, claim, appeal, or later outcome. Because the client was unidentified, the letter expressly says it may not be relied upon for Revenue and Taxation Code section 6596 purposes.

The live annotation preserves the deburring process, small taxable material sales, less-than-1-percent figure, exclusive-use boundary, and furniture-and-fixture conclusion. It omits the reseller-only and no-more-than-two-substantial-sales assumptions, the result if either is incorrect, the 12-month and trade-in rules, the cited Annotation 410.0340, the section 6596 reliance refusal, and the absence of transaction or outcome records.

What this means for you

Service businesses making very small product sales

A minor taxable sales stream did not automatically make every service asset taxable, but asset use still had to be separated.

Accountants and tax professionals

Confirm customers' resale status, quantify incidental sales, review substantial asset dispositions over rolling 12-month periods, and identify which assets supported each activity.

Common questions

Q: Why was deburring treated as a service?
A: Manufacturers supplied the parts, the company polished them, and the parts were returned for assembly and resale.

Q: Which assets were taxable?
A: Property held or used in the small materials-selling activity.

Q: Which assets were exempt?
A: Property used exclusively in the qualifying polishing activity, under the letter's assumptions.

Q: Could the client rely on the letter for statutory relief?
A: No. The request did not identify the client, so the letter denied section 6596 reliance.

Q: Did sales below 1 percent of receipts automatically exempt every asset?

A: No. Property held or used in the taxable selling activity remained taxable, and the other property had to be used exclusively in the qualifying polishing service.

Q: What would defeat the stated exemption?

A: Serving consumers rather than exclusively resellers, or making more than two substantial sales of polishing-activity property in a 12-month period.

Q: Does the source show whether the proposed sale occurred?

A: No. It includes no agreement, asset schedule, closing record, return, tax payment, dispute, or later outcome.

Citations and references

• California Revenue and Taxation Code § 6596
• California Sales and Use Tax Regulation 1595(a)(5)(A)1–2
• Sales and Use Tax Annotation 410.0340 (May 17, 1950) — cited source not included
• November 19, 1985 request letter — quoted in part but not separately included
• Customer, resale, permit, sales, gross-receipts, asset-use, prior-sale, trade-in, agreement, price, closing, return, tax, audit, dispute, and later-outcome records — implicated but not documented

Verbatim support

From the official December 12, 1985 letter:

Based on the facts recited in your letter, we assume that your client polishes metal articles exclusively for persons who resell the polished articles, and not for consumers. We also assume that your client will not make more than two sales in substantial amounts of property used in the polishing activity.

Given these assumptions, we agree that tax on the sale of the furniture and fixtures will apply only to the gross receipts from the tangible personal property held or used in the selling activity. Tax will not apply to the sale of property used exclusively in the polishing activity.

However, if either of our assumptions is incorrect, the proposed sale of furniture and fixtures will not qualify as an exempt occasional sale.

Please not that, since you have not identified your client, this letter may not be relied upon for purposes of Revenue and Taxation Code Section 6596.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0012
• Original supporting opinion: 395.0012 PDF

Original ruling text

395.0012

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 1799, SACRAMENTO, CALIFORNIA 95808)

CONWAY H. COLLIS
Second District, Los Angeles

916/ 445-6557

ERNEST J. DRONENBURG, JR
Third District, San Diego
RICHARD NEVINS
Fourth District, Pasadena

December 12, 1985

KENNETH CORY
Controller, Sacramento
DOUGLAS D. BELL
Executive Secretary

Mr. J--- -. M--M--- C--- C---, Inc.
XXX --- Square
---, CA XXXXX

Dear Mr. M---:
Your letter to Mr. Donald Hennessy dated November 19, 1985, has been referred to the undersigned for reply. On behalf of an unidentified client, you ask whether a sale of furniture and fixtures used in the client’s business will qualify as an exempt occasional sale. You cite the facts as follows: “This client is in the deburring business which involves polishing metal objects manufactured by various companies. The do not have the internal expertise or find it more acceptable to contract their work to my client. This process is a nontaxable event in that the manufacturer delivers their product to my client who deburrs same and it is then returned to the manufacturer for assembling. My client holds a Sellers Permit to accommodate very small companies who want to buy small quantities of materials used in the deburring process, which is a taxable transaction. This activity represents less than 1% of gross receipts for the last 12 month.” You believe that the proposed sale of furniture and fixtures will qualify as an exempt occasional sale under subdivision (a)(5)(A) of Sales and Use Tax Regulation 1595, which provides: “1. Operators of service enterprises such as hospitals, hotels, theaters, schools, laundromats, car washes, transportation companies, and trucking companies may make some sales incidental to their primary services business. A hospital may operate a pharmacy and cafeteria as an adjunct to the hospital. A hotel may operate a restaurant and a bar. A theater may sell popcorn to patrons. A school may operate a cafeteria and bookstore. A laundromat may sell soap to its customers.

M--- C--- C---, Inc.

-2-

December 12, 1985
395.0012

“If any of these businesses were sold, tax would apply only to the gross receipts from the tangible personal property held or used in the selling activity. “2. If, in any 12 month period, the operator of the service enterprise makes more than two sales in substantial amounts of tangible personal property used in the service enterprise, the gross receipts from those sales is subject to tax, unless otherwise exempt (such as a sale in interstate commerce). If one of the sales is a sale of the business, the tax applies to the gross receipts from the sale of the tangible personal property. In determining whether there are more than two sales of tangible personal property, trade-ins of used equipment for new, incidental to the service enterprise, will not be counted. The board’s legal staff has previously concluded that: “Polishers engaged exclusively in the business of polishing metal articles for persons who resell the polished articles are not required to hold a seller’s permit.” (Sales and Use Tax Annot. 410.0340 [5/17/50].) Based on the facts recited in your letter, we assume that your client polishes metal articles exclusively for persons who resell the polished articles, and not for consumers. We also assume that your client will not make more than two sales in substantial amounts of property used in the polishing activity. Given these assumptions, we agree that tax on the sale of the furniture and fixtures will apply only to the gross receipts from the tangible personal property held or used in the selling activity. Tax will not apply to the sale of property used exclusively in the polishing activity. However, if either of our assumptions is incorrect, the proposed sale of furniture and fixtures will not qualify as an exempt occasional sale. Please not that, since you have not identified your client, this letter may not be relied upon for purposes of Revenue and Taxation Code Section 6596. Very truly yours,

James E. Mahler
Tax Counsel
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