Was a financial institution's sale of hotel furniture and equipment acquired through foreclosure exempt as an occasional sale?

Plain-English summary

A financial institution acquired an operating hotel and restaurant through foreclosure, including its furniture, furnishings, and equipment. It later sold that personal property to a customer together with the real estate.

The institution argued that the equipment transfer was an exempt occasional sale. The Board disagreed because the institution already held a California seller's permit for selling and leasing equipment, and it handled the foreclosed property as it would equipment acquired from a vendor for sale or lease.

The equipment sale was therefore taxable, measured by fair market value. The letter separately forwarded a request concerning release of a $10,000 certificate of deposit to the district office without deciding that matter.

Transaction, separate-business rule, and source limits

Staff Counsel Warren L. Astleford answered attorney R--- W. F---'s March 6, 1995 letter for T--- T--- & L--- A---. The requester described T--- as a financial institution primarily engaged in real-estate-secured financing that occasionally took title to real property through foreclosure and resold it to recover as much of the loan as possible.

Here, T--- foreclosed on California real property containing an operating hotel and restaurant and their furniture, furnishings, and equipment. It later transferred the real property and FF&E to the current owner. Board records separately showed that T--- was registered as a retailer and held a California seller's permit to sell and lease various equipment to customers.

The letter applied sections 6051 and 6007 to retail sales and sections 6201 and 6401 to use tax when sales tax did not apply. Sections 6006.5(a) and 6367 and Regulation 1595(a)(1) supplied the occasional-sale framework; the regulation said three or more substantial sales, or a substantial number of relatively small sales, within twelve months required a permit.

The requester invoked Ontario Community Foundations, Inc. v. State Board of Equalization, 35 Cal. 3d 811 (1984). The letter explained that the case exempted hospital medical and nursing equipment used in services that did not require a permit, while taxing property related to permitted food-service, supply, and pharmacy operations. Regulation 1595(a)(3) similarly distinguished entirely separate nonselling endeavors, using unrelated hardware-store and real-estate-brokerage activities as its example.

Counsel found that distinction unavailable. T--- did not sell property from a separate non-permit business; it acquired FF&E through foreclosure and sold it to a customer as it routinely did with equipment bought from vendors for sale or lease. The FF&E sale was taxable at fair market value.

The PDF does not include the March 6 request, Board registration or permit records, loan, security instrument, foreclosure record, hotel or restaurant records, FF&E inventory, deed, sale or allocation agreement, invoices, evidence of routine equipment purchases, sales or leases, appraisal or fair-market-value support, return, tax computation, assessment, payment, refund proceeding, appeal, or later tax outcome. It also contains no certificate of deposit, bond record, release decision, district response, or proof that the separate $10,000 was released.

The letter forwarded the certificate-of-deposit request to the Torrance District Office and gave its address; it did not decide that matter. It copied an unidentified district administrator. The PDF's visible case name prints Ontario Community Foundations, Inc.; the cited reporter page resolves to the same case under the singular canonical title Ontario Community Foundation, Inc.

The live annotation preserves the financial institution, foreclosure, hotel and restaurant, FF&E and real-property transfer, existing equipment-sale and leasing permit, customer-sale analogy, rejection of the Ontario argument, tax result, and May 26, 1995 date. It omits the request and financing facts, statutory sales- and use-tax framework, twelve-month sales threshold, Regulation 1595(a)(3)'s separate-endeavor rule and example, details of the hospital case, fair-market-value measure, $10,000 deposit referral, copied administrator, missing records, and absent outcomes.

What this means for you

Lenders and financial institutions

Foreclosure does not by itself make a later equipment sale occasional. Existing retailer activities and seller's-permit obligations can make the disposition taxable.

Accountants and tax professionals

Determine whether the property was held or used in an activity requiring a seller's permit. Property from a genuinely separate non-selling endeavor may be treated differently.

Common questions

Q: Why did the occasional-sale exemption fail?
A: The institution already sold and leased equipment as a retailer and sold the foreclosed equipment to a customer in the same kind of activity.

Q: Did selling the equipment with real estate change the result?
A: No. The tangible personal property remained a taxable equipment sale on the facts described.

Q: What was the tax measure?
A: Fair market value of the furniture, furnishings, and equipment.

Q: Can property from a separate non-selling business qualify for different treatment?
A: Potentially. The cited regulation distinguishes property used in a wholly separate endeavor that does not require a seller's permit.

Q: What did the cited hospital case establish for this analysis?

A: Property used in medical and nursing services that did not require a permit could qualify as occasional, while property tied to the hospitals' permitted food-service, supply, and pharmacy operations remained taxable.

Q: Did counsel decide whether to release the $10,000 certificate of deposit?

A: No. Counsel forwarded that separate request to the Torrance District Office.

Q: Does the source show an assessment or payment based on fair market value?

A: No. It states the legal conclusion and measure but supplies no valuation, computation, assessment, payment, refund proceeding, or later disposition.

Citations and references

• California Revenue and Taxation Code sections 6006.5(a), 6007, 6051, 6201, 6367, and 6401
• California Sales and Use Tax Regulation 1595(a)(1) and (3)
• Ontario Community Foundations, Inc. v. State Board of Equalization (1984) 35 Cal. 3d 811 (printed title; reporter citation resolves to singular Foundation)
• March 6, 1995 request, retailer and permit records, loan and foreclosure materials, property and FF&E records, sale and valuation evidence, tax records, and $10,000 deposit proceedings — described or implicated but not included

Verbatim support

From the official May 26, 1995 Staff Counsel letter:

Our records reflect that T--- is registered as a retailer and holds a California seller's permit for the purpose selling and leasing various types of equipment to its customers.

Tax does not apply to the sale of property held or used by the seller in the non-selling endeavors which do not require the holding of a permit.

In this transaction, T--- acquired FF&E through foreclosure and thereafter sold this property to a customer as it would any other equipment it routinely purchased from a vendor and sold or leased to a customer.

As such, T---'s sale of the FF&E is not exempt as an occasional sale and is subject to tax measured by its fair market value.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0150
• Original supporting opinion: 395.0150 PDF

Original ruling text

395.0150

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Tele: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

May 26, 1995

────────
BURTON W. OLIVER
Executive Director

Mr. R--- W. F--Attorney at Law
XX --- --- Avenue, Suite XXX
---, CA XXXXX-XXXX
Re:

T--- T--- & L--- A--SY -- XX-XXXXXX

Dear Mr. F---:
This is in response to your letter dated March 6, 1995 requesting our opinion on whether the transfer of furniture, furnishings and equipment (“FF&E”) in conjunction with the sale of real property is exempt from tax as an occasional sale. You state: “T--- [T--- and L--- A--- (hereafter ‘T---’)] is a financial institution, the primary business of which is real estate secured financing. Occasionally, T--obtains title to certain real property through foreclosure. Thereafter, T--- sells the real property to recover as much of the amount loaned against the real property as possible. “In this case, T--- obtained title to the subject real property [located at XXXX W. --- Highway, ---, California and commonly known as C---, The G--H---, Inc.] which, at the time, was an operating hotel and restaurant, and which contained certain furniture, furnishings and equipment related to the hotel and restaurant. “Along with the transfer of the subject real property to the current owner, T--- also transferred title to the furniture, furnishings and equipment (hereafter referred to collectively as ‘FF&E’)....”

Mr. R--- W. F---

-2-

May 26, 1995
395.0150

Discussion
California imposes a sales tax on a retailer’s gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) A retail sale means a sale for any purpose other than for resale in the regular course of business. (Rev. & Tax. Code § 6007.) When sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use or other consumption in California. (Rev. & Tax. Code §§ 6201, 6401.) Thus, tax applies to T---’s sale of the FF&E to its customer inside this state unless an exemption to this sale otherwise applies. Revenue and Taxation Code section 6367 provides an exemption from sales tax for the occasional sale of tangible personal property other than vehicles, vessels, or aircraft. Revenue and Taxation Code section 6006.5(a) defines an occasional sale as a sale of property not held or used by a seller in the course of activities for which the seller is required to hold a seller’s permit, provided the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity requiring the holding of a seller’s permit. Title 18, California Code of Regulations (hereafter “Regulation”), section 1595(a)(1) further interprets Revenue and Taxation Code section 6006.5 and provides that persons making three or more sales for substantial amounts, or a substantial number of sales for relatively small amounts, in any twelve month period, are required to hold a seller’s permit. Our records reflect that T--- is registered as a retailer and holds a California seller’s permit for the purpose selling and leasing various types of equipment to its customers. In this case, T--- acquired certain real and tangible personal property (the FF&E) by way of its foreclosure on a hotel and restaurant establishment. T--- thereafter sold the FF&E to a third party along with the transfer of the subject real property. Since T--- is already required to (and presently does) maintain a seller’s permit for its equipment sales, tax applies on T---’s sale of the FF&E to its customer. You assert that Ontario Community Foundations, Inc. v. State Board of Equalization (1984) 35 Cal.3d 811 applies to T---’s situation. Ontario involved the sale of hospital assets including food service facilities, supply departments, and pharmacies which were required to maintain seller’s permits. The court found that no tax was due on the sale of the medical and nursing equipment since each hospital was not required to hold a seller’s permit in rendering medical and nursing services and that the sale of this equipment otherwise qualified as an exempt occasional sale. (Id. at p. 815.) Tax did apply, however, to the foundation’s sale of the tangible personal property relating to those operations which did require a seller’s permit. This rule is set forth in Regulation 1595(a)(3) as follows: “A person engaged in an activity or activities requiring the holding of a seller’s permit or permits may also be engaged in entirely separate endeavors which do not require the holding of a seller’s permit or permits. Tax applies to the sale of

Mr. R--- W. F---

-3-

May 26, 1995
395.0150

tangible personal property held or used in the course of an activity requiring the holding of a seller’s permit. Tax does not apply to the sale of property held or used by the seller in the non-selling endeavors which do not require the holding of a permit. For example, a person may own a hardware store at one location and a real estate brokerage business at another location, with no relationship between the two activities except that of common ownership. Under these circumstances, a sale of furniture used in the brokerage business would not be a sale of property held or used in an activity requiring the holding of a seller’s permit. A sale of tangible personal property used in the hardware business would be a sale of property held or used in an activity requiring the holding of a seller’s permit.” In the present situation, T--- is not selling property from a business it owns that does not require it to hold a seller’s permit (e.g., a real estate brokerage business). Instead, T--- holds a seller’s permit for the sale and lease of tangible personal property to its customers. In this transaction, T--- acquired FF&E through foreclosure and thereafter sold this property to a customer as it would any other equipment it routinely purchased from a vendor and sold or leased to a customer. As such, T---’s sale of the FF&E is not exempt as an occasional sale and is subject to tax measured by its fair market value. Finally, you request the release of the $10,000.00 certificate of deposit posted by the C--Corporation (SR -- XX-XXXXXX). A copy of your correspondence was forwarded to the Board’s Torrance District Office to address the release of these funds. If you have any further questions regarding the application of tax on T---’s sale of the FF&E, please write again. If you have any questions regarding the release of C--- Corporation’s bond, please write the Torrance District Office at 680 W. Knox Street, Suite 200, P.O. Box T, Torrance, California 90507-0270. Sincerely,

Warren L. Astleford
Staff Counsel
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cc:

--- --- District Administrator - ---S