Could a dairy venture deduct the cost of about $10 million of tax-paid equipment if it sold the stored machinery to a lessor and leased it back before plant operations?

Plain-English summary

A joint venture bought about $10 million of dairy-processing equipment for a plant under construction and paid 6-percent sales-tax reimbursement. It proposed to sell the equipment at its original cost to an unrelated leasing company and lease it back under a true lease. The request said the equipment had only been stored while awaiting completion of the plant.

The letter treated the proposed equipment sale as part of the venture's regular business transaction rather than an occasional sale, so the venture would be a retailer and needed a seller's permit.

Because the venture originally intended to use the equipment, paid tax on purchase, and proposed to resell it before any use, counsel said the stated facts qualified under Regulation 1701(b)(1). The venture could deduct the equipment's purchase price on the sales-tax return containing the future resale. The requester said the leasing company would pay sales tax on its purchase; the source shows no completed transaction or reporting.

Proposed transaction and source limits

The June 21, 1988 request came from a redacted representative of one of three major partners in a joint venture formed to construct, own, and operate a California dairy-products processing plant. Each partner would purchase dairy products from the venture for resale through its own retail grocery business. The requester sought an opinion before completing the proposed equipment sale.

The joint venture bought equipment from unrelated manufacturers and suppliers over several months, from approximately June 1987 through early 1988. Some invoices used a related partnership's address, but the request said all purchases were for the venture's account. The venture paid 6-percent sales tax on each purchase, originally intended plant use, later pursued the financing transaction for financial and other reasons, and represented that the equipment remained stored and unused.

The request asked four specific questions: whether the venture was a retailer under Regulation 1701; whether the equipment was unused; whether Regulation 1701(b)(1) or (b)(2) applied; and whether the venture could deduct the purchase price in the resale quarter. Counsel said the whole sale-leaseback transaction was a regular-course sale rather than occasional, required a seller's permit, and told the representative to bring the opinion to the district office when applying. Counsel had no first hand knowledge whether the equipment had been used, but said storage under the stated circumstances would count as unused. It selected Regulation 1701(b)(1), not (b)(2), and conditioned the deduction conclusion on the stated facts being correct.

The quoted Regulation 1701(a) also says the deduction must appear on the return containing the resale; a missed proper quarter requires a refund claim, and a retailer's deduction prevents a refund or credit to its vendor for the original sale. The PDF supplies no incoming letter beyond quoted excerpts, partner or entity identities, joint-venture agreement, invoices, purchase orders, equipment schedule, vendor tax receipts, related-partnership records, storage or inspection evidence, plant construction record, financing materials, seller's-permit application, sale agreement, sale proceeds, true lease, delivery, use record, tax return, deduction, refund claim, audit, assessment, protest, hearing, tax payment, appeal, or later outcome. It visibly prints that the equipment ahs been stored; this page preserves that wording in the original tail.

The live annotation preserves the joint venture, plant construction, tax-paid equipment, financing reasons, leasing company, true leaseback, pre-operation timing, retailer and seller status, regular-course holding, permit requirement, deduction conclusion, and August 4, 1988 date. Unlike the supporting PDF's repeated future-tense proposal—proposes to resell, will pay, will be, and when it resells—the live entry says the venture sold the equipment, the company leased it back, and the sale occurred. The official source provides no executed-sale record resolving that difference. The live annotation also omits the $10 million amount, 6-percent tax, purchase period, partner and grocery facts, related-partnership invoice address, original-price term, four questions, first-hand-knowledge limit, conditional wording, Regulation 1701 procedures, source typo, missing records, and absent outcome.

What this means for you

Businesses changing equipment financing before startup

Counsel said storage while awaiting operations would not count as use under the stated facts, preserving the tax-paid resale deduction if the proposed sale-leaseback occurred as described.

Accountants and tax professionals

Document original use intent, tax paid to vendors, absence of operational use, resale timing, sale price, and the quarter in which the deduction must be claimed.

Common questions

Q: Did storing the machinery count as using it?
A: Counsel said the represented storage would qualify as unused if the request's facts were correct; the Board had no firsthand knowledge.

Q: Was the resale an occasional sale?
A: Counsel said the proposed sale would be a regular-course sale requiring a seller's permit.

Q: What amount could be deducted?
A: The tax-paid purchase price of the equipment on the return containing the resale, if the facts were correct.

Q: What if the deduction was missed in the proper quarter?
A: The quoted regulation said a refund claim would be required.

Q: Did counsel independently verify that the equipment was unused?

A: No. Counsel expressly said the Board had no firsthand knowledge and relied on the request's storage representation.

Q: Did the PDF show that the sale and leaseback actually closed?

A: No. It describes a future transaction and includes no sale, lease, return, deduction, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6012(a)(1), 6014, and 6015(a)
• California Sales and Use Tax Regulation 1701(a) and (b)(1)
• June 21, 1988 request, venture, purchase, equipment, tax, storage, permit, sale, lease, return, refund, administrative, and outcome records — implicated but not included

Verbatim support

From the official August 4, 1988 Tax Counsel letter:

In the context of this entire transaction, the sale of the plant equipment is not an occasional sale; rather, it is a sale in the regular course of the taxpayer’s business and requires the holding of a seller’s permit.

We have no first hand knowledge upon which to base an opinion one way or the other on whether the taxpayer has used the equipment.

If the facts as you state them in your letter are correct, then it is our opinion that these facts fall within the circumstances set forth in Regulation 1701(b)(1).

Under these facts, it is our opinion that the taxpayer qualifies for the tax-paid purchases resold deduction and may take a deduction on its sales tax return equal to the purchase price of the equipment for the calendar quarter in which it resells the equipment to L---.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0068
• Original supporting opinion: 395.0068 PDF

Original ruling text

395.0068

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6414

August 4, 1988

--- --- ----- --- ----- --- --Dear Mr. ---:
This is in response to your letter dated June 21, 1988, in which you requested our opinion on whether a proposed sale will qualify for the “tax-paid purchases resold” deduction under Sales and Use Tax Regulation 1701. The facts as stated in your letter are as follows: “We represent one of three major partners in a joint venture (‘Taxpayer’) formed to construct, own and operate a dairy products processing plant in California. Each of the partners will purchase dairy products from the joint venture for resale in the partners’ respective retail grocery businesses. Taxpayer proposes to resell certain ‘Tax-paid’ processing equipment purchased for use in the plant under construction. Prior to consummation of the intended sale, Taxpayer desires to obtain a letter opinion from the State Board of Equalization (the ‘Board’) that such sale qualifies under the refund procedure contained in 18 Cal. Admin. Code Section 1701. FACTS “Taxpayer purchased dairy processing equipment from various manufacturers and suppliers (unrelated to Taxpayer) for the aggregate amount of approximately
$10,000,000.00. Although some of the equipment has been invoiced to the address of a related partnership, all of the equipment was purchased for the account of the Taxpayer. The equipment was purchased over a period of several months, beginning in approximately June 1987 and ending in early 1988. A 6% sales tax was paid by Taxpayer at the time of each purchase. “At the time of purchase, Taxpayer intended to use the equipment in the plant currently under construction. Since the date of purchase, for financial and other reasons, Taxpayer now wishes to resell the equipment to a leasing company, L---, and lease the equipment back from L--- under a ‘true lease’ arrangement. L--- is an entity unrelated to Taxpayer. Taxpayer has made no use of the equipment

Mr. ---

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during this time; the equipment has been stored awaiting completion of the processing plant. “L--- will pay sales tax on the purchase from Taxpayer. The purchase price to be paid by L--- will be the same amount paid by ---.” Revenue and Taxation Code section 6012(a)(1) provides that a deduction of the purchase price of property may be taken by a retailer if the retailer has purchased the property for some other reason than resale, has reimbursed his vendor for tax, and has resold the property prior to using it. Sales and Use Tax Regulation 1701, which implements section 6012(a)(1), provides in pertinent part as follows: “(a) PROCEDURE IN GENERAL. A retailer who resells tangible personal property before making any use thereof (other than retention, demonstration or display while holding it for sale in the regular course of business) may take a deduction of the purchase price of the property if, with respect to its purchase, he has reimbursed his vendor for the sales tax or has paid the use tax. If such a deduction is taken by the retailer, no refund or credit will be allowed to his vendor with respect to the sale of the property. “The deduction under the caption ‘Tax-paid purchase resold’ must be taken on the retailer’s return in which his sale of the property is included. If the deduction is not taken in the proper quarter, a claim for refund of tax must be filed. “(b) CIRCUMSTANCES WARRANTING USE. This procedure should be used in any of the following circumstances: “(1)

The retailer when making the purchase intends to use the property rather than resell it, but later resells it before making any use thereof.”

You request our opinion on the following specific points:
“1.
That Taxpayer qualifies as a ‘retailer for the purposes of the refund procedure set forth in 18 Cal. Admin. Code Section 1701; Revenue and Taxation Code section 6015(a) defines a retailer as every “seller” who makes any retail sales of tangible personal property. A “seller” is defined by Revenue and Taxation Code section 6014 as every person who sells tangible personal property “of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax.” The taxpayer will be a retailer and a seller of the plant equipment. In the context of this entire transaction, the sale of the plant equipment is not an occasional sale; rather, it is a sale in the regular course of the taxpayer’s business and requires the holding of a seller’s permit. The taxpayer’s representative who

Mr. ---

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395.0068

applies for the seller’s permit should take a copy of this opinion to the district office when so applying, to expedite matters. “2. That Taxpayer has made no use of the equipment for purposes of the refund procedure set forth in 18 Cal. Admin. Code Section 1701;” We have no first hand knowledge upon which to base an opinion one way or the other on whether the taxpayer has used the equipment. You state in your letter that the equipment ahs been stored awaiting completion of the processing plant. We would consider property stored under the circumstances to qualify as unused property for the purposes of Regulation 1701. “3. That Taxpayer falls within the specific circumstances set forth in either Section 1701(b)(1) or Section 1701(b)(2);” Under the facts stated in your letter, the taxpayer intended to use the property rather than resell it. You state that the equipment has been stored awaiting completion of the processing plant. Regulation 1701(b)(1) allows a deduction for tax-paid purchases resold if the retailer intended to use the property when making the purchase, but later resells it before making any use of the property. If the facts as you state them in your letter are correct, then it is our opinion that these facts fall within the circumstances set forth in Regulation 1701(b)(1). “4. Therefore, that Taxpayer may take a deduction on a sales tax return equal to the purchase price of the equipment for the calendar quarter in which Taxpayer resells the equipment to L---.” Regulation 1701 provides that (1) a retailer who (2) resells tangible personal property before making any use of it and (3) has reimbursed his vendor for the sales tax, may take a deduction of the purchase price of the property. According to the facts stated in your letter, the taxpayer purchased processing equipment which it intended to use in a plant under construction. The taxpayer has made no use of the equipment and the equipment has been stored awaiting completion of the plant. The taxpayer paid sales tax reimbursement at the time of each purchase. The taxpayer originally intended to use the equipment in the plant, but now intends to resell it. Under these facts, it is our opinion that the taxpayer qualifies for the tax-paid purchases resold deduction and may take a deduction on its sales tax return equal to the purchase price of the equipment for the calendar quarter in which it resells the equipment to L---. Very truly yours,

Michele F. Hicks
Tax Counsel
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