Was a contractor's sale of fixtures and equipment an exempt occasional sale because its earlier auto-parts sales to the U.S. government were exempt?

Plain-English summary

A contractor provided base-operating services at a U.S. Navy facility and transferred auto parts to the federal government under lump-sum contracts. It later sold vehicles, office equipment, small appliances, and other fixtures and equipment when disposing of facility assets.

The contractor argued that the asset sale was occasional. The Appeals recommendation concluded otherwise. Even though sales to the United States were exempt, those sales still required a seller's permit and counted in deciding whether the later asset disposition was part of a sufficient series of sales. The preceding sales did not have to be taxable retail sales.

Tax therefore applied to the fixtures and equipment. But because the Department had reduced the audit measure to $447,524, the claimant was entitled to a refund of the tax, penalty, and interest paid on the excess measure.

Record, disputed facts, authority, and source limits

Staff Counsel Lucian Khan held a January 20, 1994 telephone conference and issued this Decision and Recommendation on April 12. The source lists no representative under Appearing for Claimant; it identifies Senior Tax Auditor Michael Kitchen for the Sales and Use Tax Department. The close-out audit covered January 1, 1988 through July 31, 1989.

According to the Department, the claimant performed base-operating services under lump-sum U.S. Navy contracts at the Naval Weapons Center's China Lake facility. The services included janitorial work, garbage pickup, maintenance of buildings, roads, and equipment, and miscellaneous repairs. In July 1989 the claimant sold certain facility assets—numerous vehicles, office equipment, small appliances, building improvements, and buildings—to an unnamed buyer.

The parties disputed whether the Navy contracts involved sales of auto parts. The Department said the contracts required filters, tires, batteries, and other parts; an unidentified person reportedly said about 93% were transferred to the federal government and 7% were consumed in the claimant's vehicles. The claimant said it provided services, made no parts sales, held a permit only to pay use tax on out-of-state parts used in its vehicles, and disputed that the unidentified person or traffic manager made the statements attributed to them.

The claimant was allowed until February 20, 1994 to provide its federal contract and an affidavit from the unidentified person or traffic manager. The source does not say whether it did. It instead notes that Board records showed reported sales with corresponding deductions of $3,209,304 for the second quarter of 1989 and $1,062,917 for the third quarter. The recommendation ultimately states that the claimant made substantial federal sales and was required to and did hold a seller's permit.

The original audit measure is unresolved on the face of the source: the summary says $2,444,622, but the conclusion says the Department later reduced it from $2,244,122. The source likewise says first that the claimant paid the February 13, 1991 determination and filed its refund claim on March 21, then twice gives March 31 as the payment date. This page does not choose between those printed values or dates. The September 9, 1991 reaudit reduced the measure to $447,524 for vehicles on which the buyer paid use tax directly to DMV, real property included in the sale, and current book value of the remaining assets. The claimant did not dispute that adjusted measure at the conference.

Sections 6051, 6066, and 6381 and Regulations 1595(a)(1) and 1699(a)-(b) supported the permit and tax analysis. The recommendation also cited Business Taxes Law Guide Annotation 395.0420 and U.S. Industries, Inc. v. State Board of Equalization, 198 Cal. App. 2d 775 (1962). It concluded that exempt federal sales still belonged in the series-of-sales analysis under section 6006.5 and recommended refunding tax, penalty, and interest attributable to the measure above $447,524.

The PDF does not include the Navy contracts, asset-purchase agreement beyond the described portion, asset and book-value records, determination, payment, refund claim, September 9 reaudit, DMV records, returns, witness statements, requested affidavits, conference recording or transcript, tax calculations, final Board action, refund issuance, or later appeal. Its embedded title and subject identify 395.0140, but the document's visible heading, official URL, and live annotation identify 395.0135.

The live annotation preserves the exempt federal auto-parts sales, seller's-permit consequence, rule that preceding sales need not be taxable, asset-sale tax result, and April 12, 1994 date. It says the corporation sold all assets, while the supporting recommendation says it sold certain China Lake facility assets. It omits the service contracts and work, competing factual accounts, reported-sale deductions, audit and refund procedure, adjusted measure and refund recommendation, cited statutes, regulations, prior annotation and case, internal amount and date conflicts, PDF metadata mismatch, missing evidence, and absence of a final decision or paid refund.

What this means for you

Government contractors

An exemption for sales to the federal government does not necessarily remove seller's-permit obligations or make a later business-asset sale occasional.

Accountants and tax professionals

When closing a business, include exempt sales in the number, scope, and character analysis. Then separately verify the correct asset-sale measure.

Common questions

Q: Why did exempt government sales matter?
A: The contractor was still a seller required to hold a permit, even though the federal sales themselves were exempt.

Q: Did the earlier sales have to be taxable?
A: No. The recommendation said there was no requirement that the sales preceding the asset sale be taxable retail sales.

Q: What asset-sale measure remained after reaudit?
A: $447,524.

Q: Was the refund claim completely denied?
A: No. The recommendation granted a refund for the payment attributable to the measure above $447,524.

Q: Did the claimant agree that it sold auto parts to the Navy?

A: No. It denied making those sales and disputed the statements attributed to two people. The recommendation relied in part on Board records showing substantial reported sales and corresponding deductions.

Q: What amounts did those returns report and deduct?

A: $3,209,304 for the second quarter of 1989 and $1,062,917 for the third quarter.

Q: Does the source establish that the Board issued the recommended refund?

A: No. It contains Staff Counsel's recommendation, not a final Board order, refund check, credit record, or later disposition.

Citations and references

• California Revenue and Taxation Code sections 6006.5, 6051, 6066, and 6381
• California Sales and Use Tax Regulations 1595(a)(1) and 1699(a)-(b)
• Business Taxes Law Guide Annotation 395.0420
• U.S. Industries, Inc. v. State Board of Equalization (1962) 198 Cal. App. 2d 775
• Navy contracts, partial asset-purchase agreement, additional book-value documentation, February 13, 1991 determination, payment and refund claim, September 9, 1991 reaudit, DMV records, returns, witness evidence, final action, and refund records — described or implicated but not included

Verbatim support

From the official April 12, 1994 Decision and Recommendation:

Although the sales to the U.S. Government would be exempt, those sales must be considered along with the sale of the assets, to determine whether the sale of the assets was occasional.

Claimant disputes that --- or the traffic manager ever told the auditor that auto parts were sold to the U.S. Government.

Although the sales were exempt, petitioner was required to, and did hold a seller's permit. For tax to apply on the sale of assets, the sale need only be one of a series sufficient in number and scope. There is no requirement that sales preceding the sale of assets must be taxable retail sales.

Grant the claim for refund to the extent the payment made on March 31, 1991 exceeds the measure of $447,524 in the reaudit dated September 9, 1991.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0135
• Original supporting opinion: 395.0135 PDF

Original ruling text

STATE OF CALIFORNIA
395.0135
BOARD OF EQUALIZATION
4/12/94
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Claim
for Refund Under the
Sales and Use Tax Law of:

Claimant

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DECISION AND RECOMMENDATION
No. ----

The Appeals conference in the above-referenced matter was held by telephone by Staff Counsel Lucian Khan on January 20, 1994 in Sacramento, California. Appearing for Claimant:

Appearing for the
Sales and Use Tax Department:

Michael Kitchen
Senior Tax Auditor

Subject of Claim
Tax assessed on the sale of fixtures and equipment measured by $447,524 for a close-out audit covering the period January 1, 1988 through July 31, 1989. Contention The sale of the fixtures and equipment was an exempt occasional sale. Summary According to the Sales and Use Tax Department (SUTD), claimant entered into contracts with the U.S. Navy for providing base-operating services at the U.S. Naval Weapons Center at the Navy's China Lake facility. Services included janitorial, garbage pickup, maintenance of buildings, roads, and equipment, and miscellaneous repairs. In July 1989, claimant sold certain assets at this facility to --- Generally, the assets sold consisted of numerous vehicles, office equipment, small appliances, building improvements and buildings. In a close-out audit covering the above period, a measure of $2,444,622 was attributed to the sale of fixtures and equipment. This measure was based on a review of a portion of an asset purchase agreement which was provided by claimant. On February 13, 1991, a determination was issued, and on March 21, 1991, claimant made payment of the amount determined and simultaneously filed a claim for refund. In the written claim, claimant argued the measure attributed to the sale of the assets was excessive, and an occasional sale.

Claimant then provided additional documentation which indicated the book value of the assets as $447,524, and SUTD adjusted the measure to this amount in a reaudit report dated September 9, 1991. The adjustments related to various vehicles for which the purchaser paid use tax directly to the Department of Motor Vehicles, adjustments for real property included in the sale, and adjustments to reflect the current book value of the remaining assets. At the conference, claimant indicated there was no disagreement with the measure as adjusted in the reaudit of September 9, 1991. Therefore, the sole issue is whether the sale of the assets was an occasional sale. SUTD argues that the sale of the assets was not an occasional sale because claimant routinely sold auto parts to the U.S. Government. This was confirmed by --- as well as the traffic manager who worked for claimant. Claimant's contract with the Navy is lump sum and requires it to supply filters, tires, batteries, etc. --- indicated approximately 93 percent of the auto parts were transferred to the U.S. Government with the remaining seven percent selfconsumed by claimant for its own vehicles. Although the sales to the U.S. Government would be exempt, those sales must be considered along with the sale of the assets, to determine whether the sale of the assets was occasional. Here, because of the sales to the U.S. Government, claimant's sale of the assets would not qualify as occasional. Claimant argues that its only business was to perform maintenance of buildings, roads, and equipment. No sales of parts were ever made to the U.S. Government. Claimant only held a permit to pay use tax on auto parts which were purchased from outside California and installed in its own vehicles. Claimant disputes that --- or the traffic manager ever told the auditor that auto parts were sold to the U.S. Government. Claimant was allowed until February 20, 1994 to submit further evidence in support of its argument, which consists of the following:

1. Copy of its contract with the U.S. Government, to determine if the contract provides
   for supplying of auto parts.
2. An affidavit from --- or the traffic manager as to whether statements were made to the
   auditor that auto parts were sold to the government.
   In reviewing the Board's records, it was noted that for the second quarter 1989, claimant reported sales, and took a corresponding deduction in the amount of $3,209,304. For the third quarter 1989, claimant reported sales and took a corresponding deduction in the amount of
   $1,062,917.
   Analysis and Conclusions
   Tax applies to all retail sales of tangible personal property including capital assets whether they are sold in one transaction or a series of sales, held or used by a seller in the course of an activity for which a seller's permit is required. (Revenue and Taxation Code Section 6051, Sales and Use Tax Regulation 1595 (a) (1).) Every' person engaged in the business of selling tangible personal property of a kind the gross receipts from the .retail sale of which are required 'to be included in the measure of sales tax, is required to hold a seller's permit. This permit is required notwithstanding the fact that sales to the United States or its instrumentalities are exempt. (Rev. & Tax. Code §§ 6066, 6381;

Regs. 1595(a) (1), 1699(a) and (b).) Even where equipment has been used in an activity of making sales for resale to a federal instrumentality. the sale of the equipment used in the activity would be taxable. (Business Taxes Law Guide Annotation 395.0420.) The term "occasional sale" includes a sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller's permit provided the sale is not one of a series sufficient in number, scope and character to constitute an activity for which a seller's permit is required. (Rev. & Tax. Code § 6006.5, Reg. 1595(a) (1).) One who customarily makes sales at retail and holds a seller's permit is subject to retail sales tax on the sale of all capital assets used in operating the business. The sale of the business assets in such a case is not an occasional sale. Each sale in question is one of a series of sales sufficient in number, scope and character to constitute an activity requiring a holding of a seller's permit. (U.S. Industries. Inc. v. State Board of Equalization (1962) 198 Cal.App.2d 775.) Based on the facts and the above authority, we conclude the sale of the fixtures and equipment would not qualify as an exempt occasional sale. For the second and third quarters of 1989, petitioner made substantial sales to the U.S. Government. Although the sales were exempt, petitioner was required to, and did hold a seller's permit. For tax to apply on the sale of assets, the sale need only be one of a series sufficient in number and scope. There is no requirement that sales preceding the sale of assets must be taxable retail sales. Accordingly, tax applies. It is noted, however, that claimant made payment on March 31, 1991 for the total amount billed in the determination of February 13, 1991. Since the time of that payment, SUTD has reduced the measure from $2,244,122 to $447,524. Therefore, petitioner is entitled to a refund of the tax, penalty and interest which relates to the September 9, 1991 adjustment. Recommendation Grant the claim for refund to the extent the payment made on March 31, 1991 exceeds the measure of $447,524 in the reaudit dated September 9, 1991.

4/12/94
Lucian Khan, Staff Counsel

Date