Was a wood processor's equipment sale occasional when it incorporated ex-tax fillers, adhesives, stains, inks, and sealers into customer-owned wood?

Plain-English summary

A company processed customer-furnished wood into vinyl-laminated products that a related customer sold. The processor bought fillers, adhesives, stains, inks, and sealers ex tax and incorporated them into the wood. Those materials cost about 17 percent of its sales volume.

Processing the wood alone would not have required a seller's permit because the customer was not a consumer. But the incorporated components changed the analysis. The processor transferred title to them when it returned the finished wood, and part of the processing compensation was assumed to reimburse their cost. That was a sale for consideration.

The finished wood products were suitable for retail sale and were ultimately sold at retail. The processor therefore met the historical definition of a seller and had to hold a permit. Its equipment was used in that permit-requiring activity, so the equipment disposition did not qualify as an exempt occasional sale. The audit staff's separate recommendation to adjust the sale price was not disputed in the letter.

Petition, component-sale analysis, and source limits

Tax Counsel Thomas L Hartigan answered attorney D--- O--- concerning redacted H--- & H--- W--- Products and a redacted seller's account. The attorney's July 18, 1974 letter had filed a petition for redetermination with two contentions: the taxpayer's equipment sale to I--- G--- and J--- G--- was an exempt occasional sale, and the sales price used to compute tax was too high.

Audit staff had already recommended adjusting the sale price on the second contention, and Principal Auditor R. B. Petersen had told the client that by a September 13, 1974 letter. Counsel concurred. On the first contention, however, counsel recommended redetermination without adjustment because the equipment transaction did not qualify as an occasional sale. The source gives neither amount nor final Board action on either recommendation.

The taxpayer processed wood furnished by a related-company customer into vinyl-laminated products the customer sold. The taxpayer bought wood fillers, adhesives, stains, inks, and sealers ex tax and incorporated them into the wood; their cost represented 17 percent of sales volume.

Under section 6006.5(a), an equipment sale could qualify as occasional only if the seller had not held or used the equipment in activities requiring a seller's permit. Processing the customer's wood alone was not a sale under section 6006(a) because the customer was not a consumer, a point tied to historical BTLG Annotation 395.0340. The components changed the result: title passed when they were incorporated and the wood returned, and counsel assumed that part of the processing compensation reimbursed their cost. That consideration made the component transfers sales.

Sections 6066 and 6014 required a permit when the taxpayer sold tangible personal property of a kind whose retail sale would be taxable. Counsel considered the components separately to find a sale but the processed wood as a whole to find retail-taxable property. He found no precedent requiring the component itself to be retail-suitable when it was processed into property that was.

Glass-Tite Industries, Inc. v. State Board of Equalization, 266 Cal. App. 2d 691, did not change the result. Its diode subassemblies were made by a manufacturer, were not retail-suitable when produced, and were integrated by manufacturer-customers into other products. Here, the taxpayer was a processor, the finished goods were retail-suitable, and the customer sold them rather than incorporating them into another product.

The PDF does not include the July 18 petition, September 13 letter, audit recommendation, sale-price calculation, processor and customer contracts, ownership records, furnished wood, component purchase and ex-tax records, production records, sales-volume calculation, invoices or compensation allocation, title terms, customer retail-sale records, equipment inventory or use history, equipment-sale agreement, buyer identities, price or payment, permit records, Annotation 395.0340 source, return, audit workpapers, proposed determination, Board action, assessment, payment, refund claim, appeal, or later outcome. The reimbursement finding is stated as an assumption, and the source does not establish either recommendation's disposition.

The live annotation preserves the related-customer wood processing, vinyl-laminated product, listed ex-tax components, section 6006.5(a) occasional-sale condition, no-consumer processing rule, component sales and permit requirement, no-exemption result, and January 14, 1975 date. It cites section 6006(b) for the processing rule, while the supporting letter cites section 6006(a). It omits the redetermination petition, equipment buyers, two-contention structure, audit's sale-price recommendation and counsel's concurrence, 17-percent cost, sections 6014 and 6066, title passage, assumed reimbursement, separate-component/whole-product method, Annotation 395.0340, Glass-Tite comparison, recommendation-only posture, missing records, tax measure, Board action, and later outcome.

What this means for you

Contract processors

A service label does not resolve permit status when the processor buys and transfers component materials as part of the finished product.

Accountants and tax professionals

Trace who furnishes each input, whether it was bought ex tax, how compensation covers it, when title passes, and whether the processed output is ready for retail sale.

Common questions

Q: Was processing customer-owned wood itself a sale?
A: Not under the letter's analysis because the customer was not a consumer.

Q: Why were the fillers and other components treated as sold?
A: The processor transferred their title in the finished wood and was assumed to receive reimbursement through its processing compensation.

Q: Why did the equipment sale fail occasional-sale treatment?
A: The equipment was used in an activity requiring a seller's permit: selling incorporated components in retail-ready wood products.

Q: Did counsel reject both petition contentions?

A: No. The letter concurred with audit staff's recommendation to adjust the sale price, but recommended no adjustment on the occasional-sale contention.

Q: Why did counsel distinguish the Glass-Tite case?

A: That case involved manufacturer-produced subassemblies not suitable for retail sale and manufacturer-customers that integrated them into other products. The wood processor's finished goods were retail-suitable and its customer sold them.

Q: Did the source show the final redetermination?

A: No. It contains counsel's recommendations but no tax amount, Board action, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6006.5(a), 6014, 6066, and 6367
• Historical Business Taxes Law Guide Annotation 395.0340, dated March 20, 1951
• Glass-Tite Industries, Inc. v. State Board of Equalization, 266 Cal. App. 2d 691 (1968)
• July 18, 1974 redetermination petition, September 13 Principal Auditor letter, and audit recommendation — described but not included
• Wood, component, production, compensation, title, retail-sale, equipment, permit, audit, redetermination, Board, payment, and outcome records — implicated but not included

Verbatim support

From the official January 14, 1975 Tax Counsel letter:

With regard to the first contention, however, we recommend that redetermination be made without adjustment as to it. It is our view that the transaction in question does not qualify as an occasional sale.

Taxpayer transferred title to the components when he incorporated them into the wood and returned the wood to the customer.

It must be assumed that part of the compensation for processing represented reimbursement for the cost of the components, thus there was consideration received for the transfer of title as to them, and a sale took place.

However, the former were incorporated into the latter and we have found no precedent that the property sold must of and in itself be of a kind sold at retail when it is processed into property which is.

Furthermore, the goods as processed were suitable for retail sale.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0095
• Original supporting opinion: 395.0095 PDF

Original ruling text

395.0095
STATE OF CALIFORNIA

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

January 14, 1975

Mr. D--- O--Attorney at Law
XXXXX --- Blvd., Suite XXX
--- ---, CA XXXXX

Dear Mr. O---:
RE: H--- & H--- W--- Products
SR – XX-XXXXXX
Reference is made to your petition for redetermination filed on behalf of the above-named taxpayer with your letter of July 18, 1974. The petition has two contentions. One, that the transaction whereby taxpayer sold its equipment to I--- G--- and J--- G--- was an occasional sale under Revenue and Taxation code Sections 6367 and 6006.5 and hence not subject to the sales tax. The other, that the sales price on which the tax was computed was too high. Recommendation has been forwarded to the Board by the audit staff that a redetermination be made to adjust the sale price in accordance with the second contention. Principal Auditor, R. B. Petersen, so informed your client via letter dated September 13, 1974. We concur in that recommendation. With regard to the first contention, however, we recommend that redetermination be made without adjustment as to it. It is our view that the transaction in question does not qualify as an occasional sale.

Mr. D--- O--(SR – XX XXXXXX)

-2-

January 14, 1975
395.0095

Taxpayer processed wood furnished by its customer, a related company, into vinyl laminated wood products which the customer sold. However, the processing required incorporating materials into the wood, such as wood fillers, adhesives, stains, inks, and sealers. Taxpayer purchased the materials ex tax at a cost representing 17 percent of its sales volume. The sale of its equipment would have qualified as an occasional sale under Section 6006.5(a) if it was a sale of property not held or used by the seller-taxpayer in the course of activities for which it was required to hold a seller’s permit. If the only activity of the subject taxpayer had been processing the wood for its customer, not a consumer, the taxpayer would not have required a seller’s permit because that activity is not a sale. Under Section 6006(a), for a processing of materials furnished by a customer to be a sale, the customer must be a consumer. Business Taxes Law Guide Annotation 395.0340, 3/20/51. As analyzed in detail below, however, the additional activity of this taxpayer with regard to the components was one requiring the holding of a seller’s permit, thus the sale of the equipment was not an exempt occasional sale. Section 6066 requires every seller to hold a permit. Section 6014, defining “seller”, has two requirements: engaging in the sale of tangible personal property; the property must be of a kind the retail sale of which would be taxable. Here the first requirement was met. Section 6006(a) defines a sale as a transfer of title to tangible personal property for a consideration. Taxpayer transferred title to the components when he incorporated them into the wood and returned the wood to the customer. It must be assumed that part of the compensation for processing represented reimbursement for the cost of the components, thus there was consideration received for the transfer of title as to them, and a sale took place. As to the second requirement, that the property sold must be of a kind the retail sale of which would be taxable, the equipment together with the components were used to produce property, i.e., vinyl laminated wood products, which were ultimately sold at retail. Thus, the second requirement of the definition of seller was met. It is appreciated that to arrive at the above conclusions we have considered the components separately to satisfy the “sale” requirement, and the processed wood as a whole to satisfy the “kind of property” requirement in the definition of seller. However, the former were incorporated into the latter and we have found no precedent that the property sold must of and in itself be of a kind sold at retail when it is processed into property which is. Glass-Tite Industries, Inc. v. State Board of Equalization, 266 Cal. App. 2d 691, would upon first consideration appear to suggest a contrary rule, namely, that the property sold must be of a kind in itself suitable for sale at retail. However, the Glass-Tite case gave that rule with regard to the product of a manufacturer, diode sub-assemblies, which were not suitable for sale at retail in the form produced, and had to be integrated into another product by the customers who were also

Mr. D--- O--(SR – XX XXXXXX)

-3-

January 14, 1975
395.0095

manufacturers. Here, none of these special circumstances is present. The taxpayer was a processor of goods furnished by another and not a manufacturer as such. Furthermore, the goods as processed were suitable for retail sale. Lastly, the customer furnishing the wood to be processed was not a manufacturer incorporating the goods, in turn, into another product to be sold, but was simply a seller of the goods as processed. Very truly yours,

Thomas L Hartigan
Tax Counsel
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bc: --- --- – District
--- – Auditing (RBP)
Petition Unit