Was a service station's sale of removable car-wash equipment exempt as an occasional sale because car washing was a service activity?

Plain-English summary

A partnership operated gasoline retailing and a car wash at the same location. A wash cost $1.75 without gasoline, but its price fell in steps to $1.19, $0.69, or $0.29 as the customer bought more gasoline. The business was later sold for $500,000, excluding land.

The owners argued that selling the car-wash equipment was exempt because washing cars was a service. The hearing officer disagreed. The equipment remained tangible personal property because the sellers had both the right and the lease obligation to remove it. A restriction in a successor's sublease did not change the equipment's status when the sellers transferred it.

The equipment sale was not occasional. The sellers held a permit for retail gasoline sales, and the linked pricing showed that the car wash was an integral part of that same business activity. Substantially changed ownership also prevented the alternative similar-ownership rule from applying. The recommendation was to redetermine without adjustment.

Audit, property status, integrated activity, and source limits

Hearing Officer Robert H. Anderson heard the redetermination petition in Inglewood on July 14, 1975 and signed his recommendation on July 28. Petitioners J--- M--- and F--- G--- were represented by R--- M---, president of successor V--- Corporation, which the decision says was contractually liable for the tax between buyer and seller. Principal Auditor R. B. Petersen and Auditor R. E. Blomquist appeared for the Board.

The audit covered August 21, 1972 through March 31, 1973, and a determination issued December 11, 1974. The source redacts the liability measures. It does disclose that petitioners reported $13,185 on the service-station assets and that the auditor initially used December 31, 1972 net book values of $1,889 for office equipment, $37,009 for leasehold improvements, $118,445 for car-wash equipment, and $8,189 for a neon sign—a $165,542 total and $152,357 additional measure after the reported amount.

After a May 17, 1974 office conference, a reaudit removed leasehold improvements and the neon sign and reduced the office- and wash-equipment values for additional depreciation and an estimated 10% attachment cost. The remaining dispute concerned only gross receipts from the car-wash equipment.

The partnership began about August 21, 1972 and sold the business, excluding land, to V--- Corporation for $500,000 on March 11, 1973. R--- M--- and V--- F. N--- owned the successor, so ultimate ownership changed substantially and section 6006.5(b) did not apply. Washes cost $1.75 without gasoline, $1.19 with 7–11.9 gallons, $0.69 with 12–14.9 gallons, and $0.29 with 15 or more gallons.

The source says the land was under a March 6, 1974 prime lease from two named-but-redacted lessors, a date almost one year after the stated March 11, 1973 business sale. It does not explain that chronology. It says M--- and G--- had both a right and obligation to remove the equipment upon lease termination and vacancy. The prime lease was assigned to N--- and M---, who subleased to their corporation. Although that sublease reportedly limited removal without their consent, counsel treated the restriction as meaningless because they also owned the corporation and the prime lease retained the removal right. Thus, the property was tangible personal property when the petitioners sold it.

Section 6006.5(a) also did not exempt the sale. The gasoline retailing required a seller's permit, and the gallon-based wash discounts made the wash operation integral to that same activity. Counsel cited U.S. Industries v. State Board of Equalization, 198 Cal. App. 2d 775 (1962), for the statute's specific occasional-sale definitions. The reporter citation resolves to the printed case.

The recommendation invoked another substantially identical matter, S--- P--- Car Wash: the Board reportedly heard it August 14, 1974 and decided January 8, 1975 that its equipment transfer was not occasional. The August 7 cover letter says its hearing summary was enclosed, but the published PDF does not include it. The cover letter transmitted this recommendation to V--- Corporation after a January 3 petition and asked the recipient to say whether a Board hearing was still desired.

The PDF does not include the audit, determination, payment or collection record, January 3 petition, May 17 conference record, sale contract, allocation, depreciation support, attachment-cost calculation, prime lease, assignment, sublease, property records, related S--- P--- hearing summary or decision, response to the Board-hearing offer, Board minutes or order, redetermination, refund or collection outcome, or later appeal. The recommendation's Reviewed for Audit signature and date lines are blank. It does not establish that the Board adopted the recommendation.

The live annotation preserves the shared premises, gasoline-linked wash discount, business sale, taxable-personal-property result, integrated-activity rationale, and July 28, 1975 date. It omits the parties and procedure, sale price and ownership change, equipment classification and leases, audit period and values, reaudit, section 6006.5(a) and (b), cited case, related Board matter, August 7 transmittal and hearing offer, unresolved lease chronology, missing records, recommendation posture, and absent final action.

What this means for you

Service stations and car-wash operators

Bundled or discounted pricing can show that a service operation and taxable retail operation are one integrated activity for an asset-sale analysis.

Accountants and tax professionals

Review lease removal rights, ownership changes, permit-requiring activities, and cross-promotional pricing before treating equipment as realty or an occasional-sale asset.

Common questions

Q: Why was the car-wash equipment personal property?
A: The sellers had a right and an obligation to remove it under the prime lease.

Q: Why were gasoline and car washing treated as integrated?
A: The wash price decreased according to the number of gallons of gasoline purchased.

Q: Did the service characterization create an occasional sale?
A: No. The equipment was held in the integrated business activity for which the gasoline seller's permit was required.

Q: What date controls this page?
A: July 28, 1975, the signed date of the operative recommendation; the attached transmittal letter is dated August 7, 1975.

Q: What did the initial asset-value schedule show?

A: $165,542 total: $1,889 office equipment, $37,009 leasehold improvements, $118,445 car-wash equipment, and $8,189 for a neon sign. The petitioners had reported $13,185, but a later reaudit reduced the auditor's measure.

Q: Did similar ultimate ownership exempt the sale?

A: No. The recommendation said the buyer's ownership differed substantially, so section 6006.5(b) did not apply.

Q: Did the Board adopt this recommendation?

A: The published source does not establish that. Its cover letter offered a Board hearing if still desired, and no response, minutes, order, or final redetermination is included.

Citations and references

• California Revenue and Taxation Code section 6006.5(a) and (b)
• U.S. Industries, Inc. v. State Board of Equalization (1962) 198 Cal. App. 2d 775
• S--- P--- Car Wash, SR -- XX XXXXXX, heard August 14, 1974 and reportedly decided January 8, 1975 — hearing summary referenced as enclosed but not included
• Audit, determination, petition, conference record, sale and valuation records, leases and assignments, Board-hearing response, final action, and tax outcome — described or implicated but not included

Verbatim support

From the official July 28, 1975 Hearing Officer recommendation and August 7 transmittal:

The petition was construed to contain a request for a Board hearing which is noted. If a hearing before the Board is still desired, please indicate so by return mail and the matter will be set as soon as possible.

Notwithstanding the restriction placed on the corporation with respect to the removal of the equipment, the property was tangible personal property when sold by M---/G--- who did have a right of removal and it is M---/G--- who are liable for the sales tax on the sale.

Petitioners held a seller's permit because they were making retail sales of gasoline. The car wash activity was an integral part of that same activity as evidenced by the way car washes were sold.

Redetermine without adjustment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0160
• Original supporting opinion: 395.0160 PDF

Original ruling text

395.0160

STATE OF CALIFORNIA

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

August 7, 1975

V--- Corporation
R--- C--- Car Wash
XXXX --- Boulevard
--- ----, Calif. XXXXX
SR -- XX XXXXXX
Attention:

Mr. R--- M---

Dear Mr. M---:
Enclosed is a copy of the decision and recommendation made in respect to the petition of J--- M--- and F--- G--- filed by you last January 3, 1975. The petition was construed to contain a request for a Board hearing which is noted. If a hearing before the Board is still desired, please indicate so by return mail and the matter will be set as soon as possible. For your information, and as agreed, I have enclosed a copy of the hearing summary prepared for the Board in the matter of the petition of S--- P--- Car Wash. The issue in that case is the same as in the petition of R--- C--- Car Wash, and the facts with respect to sales of gasoline and car washes are substantially identical. Very truly yours,

Robert H. Anderson
Tax Counsel
RHA:RW
Enclosure
Bc:

Inglewood – District Administrator
Attached are copies of the Decision and Recommendation

STATE OF CALIFORNIA

395.0160
BOARD OF EQUALIZATION

In the Matter of the Petition for
Redetermination of the State and Local
Sales Tax;
J--- M--- & F--- G--dba R--- C--- CAR WASH,
Petitioners.

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DECISION AND RECOMMENDATION
OF HEARING OFFICER
No. SR -- XX XXXXXX

The above-entitled matter came on regularly for hearing on Monday, July 14, 1975 in Inglewood, California. Appearing for Petitioner:

Mr. R--- M---, President1
V--- Corporation
XXXX --- Boulevard
--- ---, California XXXXX

Appearing for the Board:

Mr. R. B. Petersen, Principal Auditor
Inglewood District
Mr. R. E. Blomquist, Auditor
Inglewood District
Protest

Pursuant to an audit covering the period from 08-21-72 through 03-31-73, and a determination issued on December 11, 1974, Petitioners protest the assessment of sales tax on the retail sale of a business consisting of assets used in the operation of a gasoline sales enterprise and a car wash service. The measure of the audited liability is $XX,XXX and represents the gross receipts from the car wash equipment. The total reaudited measure of tax was $XXX,XXX which included a small amount representing receipts from the sale of office equipment which is not protested. Tax was paid on equipment used in making sales of gasoline measured by $XX, XXX and this was credited against the $XXX,XXX leaving a net liability measured by $XX,XXX.

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V--- Corporation is a successor to the business and contractually is liable for the tax as between buyer and seller.

R--- C--- Car Wash.
SR -- XX XXXXXX

-2-

August 7, 1975
395.0160

Contentions
The sale of car wash equipment is not subject to tax as this was a service and the items were not used in connection with a business requiring a sales tax permit. Summary The facts are not in dispute. Petitioners, M--- and G--- were partners and owners of the business in question. The business began on or about August 21, 1972, and included retail sales of gasoline and car washes. The car wash sales were tied into retail sales of gasoline as follows: Cost of Car Wash
$1.75
1.19

without gas purchase.
with purchase of 7 to 11.9 gallons of gas.

.69

with purchase of 12 to 14.9 gallons of gas.

.29

with purchase of 15 or more gallons of gas.

On March 11, 1973, the business was sold to the V--- Corporation for $500,000 which did not include land. Ownership in V--- was held by R--- M--- and V--- F. N--- so the change in ownership pursuant to the sale was substantial. Petitioners reported $13,185 as the measure of tax on the sale of service station assets. The auditor originally set up the sales price of the assets based on net book values as of December 31, 1972, as follows: Office Equipment Leasehold Improvements Car Wash Equipment Neon Sign

$

Less reported
Additional measure

$

1,889
37,009
118,445
8,189
165,542
13,185
152,357

R--- C--- Car Wash.
SR -- XX XXXXXX

-3-

August 7, 1975
395.0160

On or about May 17, 1974, there was an office conference with Mr. M---, president of the successor corporation with the result that a reaudit was made which reduced the audited measure of tax to the amounts shown under protest above. The reaudit was based on deleting leasehold improvements and reducing the book value of office and car wash equipment to reflect additional depreciation and cost of attachment estimated at 10 percent. The neon sign was also deleted. Thus, this controversy is solely over the assessment of tax on receipts from the sale of the car wash equipment. The land on which the car wash equipment is located is leased from a N--- L. and G--- E. C--under a lease dated March 6, 1974. The owners of the equipment, M---/G---, not only had a right to remove the equipment, they had an obligation to do so if and when the lease was terminated and they vacated the premises. The lease was assigned to N---/M---, owners of V--- Corporation, and was approved by the C---s. N---/M--- subleased the premises to V--- Corporation. It is understood that the sublease by N---/M--- to V--- contained a provision that restricted the removal of the equipment without the consent of N---/M---. This point was raised in the petition to argue that the property was realty after the sale, but it was not raised at the hearing. Conclusions Notwithstanding the restriction placed on the corporation with respect to the removal of the equipment, the property was tangible personal property when sold by M---/G--- who did have a right of removal and it is M---/G--- who are liable for the sales tax on the sale. Further, the restriction is meaningless in light of the fact that it was placed on the corporation by N---/M--- who also owned the corporation. Regardless of the restriction placed on a sublease there is still the right of removal in the prime or original lease with the C---s. With respect to the issue of whether the equipment was or was not held in an activity requiring a seller’s permit, it is concluded that it was so held. Transactions qualifying as occasional sales are limited to the specific definitions set forth in section 6006.5 of the California Revenue and Taxation Code (see U.S. Industries v. State Board of Equalization (1962) 198 Cal. App. 2d 775). Inasmuch as the real and ultimate ownership of the equipment, after the sale, was substantially changed the provisions of subsection (b) of section 6006.5 do not apply.

R--- C--- Car Wash.
SR – XX XXXXXX

-4-

August 7, 1975
395.0160

Petitioner raises the issue which requires the application of subsection (a) of section 6006.5 which defines a transaction as an occasional sale where the property sold was not held or used in the course of a business activity for which a seller’s permit was required. Petitioners held a seller’s permit because they were making retail sales of gasoline. The car wash activity was an integral part of that same activity as evidenced by the way car washes were sold. Thus, it is concluded that the sale did not meet the test under subsection (a) of section 6006.5 either. The Board considered a similar matter when it heard the petition of S--- P--- Car Wash, SR -XX XXXXXX on August 14, 1974. The case was decided on January 8, 1975, when the Board concluded that the transfer of equipment did not qualify as an occasional sale. In that case, as here, the sales of gasoline and the car wash function were an integral part of the same business activity. Recommendation Redetermine without adjustment.

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Robert H. Anderson, Hearing Officer

JUL 28, 1975
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Date

Reviewed for Audit:

_________
Principal Tax Auditor

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Date