Was equipment from a separate-city warranty service center exempt when the same company sold the disk drives serviced there?

Plain-English summary

A computer company sold products from one location under a seller's permit and operated a customer-support center in another city without a separate permit. The support center performed nontaxable warranty maintenance on disk drives sold by the company. When the center closed, its equipment was sold for salvage value.

The company argued that the center was a separate nonselling endeavor. The letter disagreed. Warranty service for the company's own disk-drive sales and consolidated accounting tied the center to the retail operation.

The assets were therefore held in one unified business requiring a seller's permit. Their sale was not an occasional sale and was subject to sales tax despite the separate address and lack of a center-specific permit.

Reported closure, assumed customer link, and source limits

Tax Counsel R. L. Dick answered a September 30, 1986 letter from Mr. J--- S--- of H--- A---, Ltd.'s Computer Division. The quoted request said H--- would discontinue a customer-support center on October 1 and sell the equipment there for salvage value to H--- Computer Products (A---), Inc. as of the same date.

H--- held a seller's permit for its computer-sales location in another California city. The separately located support center had never held one because its work—warranty maintenance on disk drives—was described as nontaxable. The requester argued that Regulation 1595 made the equipment disposition an occasional sale.

Sections 6051, 6367, and 6006.5(a) supplied the general retail-sales and occasional-sale framework. Regulation 1595(a)(3) allowed assets from an entirely separate nonselling endeavor, illustrated by unrelated hardware-store and real-estate-brokerage businesses under common ownership. Regulation 1595(a)(5)(B)(2) instead taxed asset sales when a service enterprise and sales business operated together as one business.

The critical customer link was stated conditionally in the supporting letter: the center serviced tangible disk drives which we assume was sold by H---. The letter also said the requester reported consolidated accounting for the sales site and support center. Given those facts, separate cities and lack of a site-specific permit did not make the center independent. The assets belonged to the unified business requiring H---'s permit, so their sale was taxable.

The current live annotation states without qualification that the center serviced disk drives sold by the taxpayer. This page preserves the letter's express assumption and separately reports the current annotation's phrasing.

The PDF does not include the September 30 request, company and buyer records, disk-drive sales or customer records, warranty terms or service work, consolidated ledgers, permits, site and closure records, equipment inventory, title, valuation or salvage support, sale agreement, invoice or payment, return, tax calculation, assessment, payment, refund claim, protest, appeal, or later outcome. The quoted request describes an intended October 1 sale, but the source does not establish that it closed or that tax was reported, assessed, or paid.

The live annotation preserves the computer sales site and permit, separate-city warranty center and no center permit, closure and equipment sale, consolidated accounting, unified-business rationale, taxable result, and March 2, 1987 date. It treats H---'s sale of the serviced drives as definite rather than the supporting letter's assumption. It omits the requester and date, planned October 1 timing, named buyer and salvage value, quoted request, statutory and regulatory framework and examples, missing records, and absent transaction and tax outcome.

What this means for you

Retailers with separate service locations

Physical distance and separate permits do not establish a separate business when warranty work supports products sold by the same company.

Accountants and tax professionals

Review customer linkage, warranty obligations, shared accounting, management, and the economic purpose of the service site before classifying its assets.

Common questions

Q: Did the service center have its own seller's permit?
A: No, but that did not decide whether it was part of the company's permitted business.

Q: What linked the center to retail sales?
A: It performed warranty maintenance on disk drives sold by the company and used consolidated accounting.

Q: Did being in another city make it separate?
A: No. The letter focused on operational integration rather than geography.

Q: Was the salvage-value equipment sale exempt?
A: No. It was a taxable sale of assets held in the unified seller-permit business.

Q: Did the supporting letter establish that H--- sold the serviced drives?

A: No. It expressly assumed that link from the described facts. CDTFA's live annotation states the link without that qualification.

Q: When was the center supposed to close and sell its equipment?

A: The quoted September 30 request said both would occur October 1, 1986, with the equipment sold for salvage value to H--- Computer Products (A---), Inc.

Q: Does the PDF prove that the sale closed or tax was paid?

A: No. It includes no sale, invoice, payment, return, assessment, refund proceeding, or later disposition.

Citations and references

• California Revenue and Taxation Code sections 6006.5(a), 6051, and 6367
• California Sales and Use Tax Regulation 1595(a)(3) and (a)(5)(B)(2)
• September 30, 1986 request and described warranty, sales, accounting, permit, closure, equipment, salvage-sale, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official March 2, 1987 Tax Counsel letter:

We will sell our equipment located there for salvage value to H--- Computer Products (A---), Inc. as of the same date.

You noted that the activities H--- conducted at the Customer Support Center were the warranty maintenance service for tangible personal property (disk drives) which we assume was sold by H---.

You also noted that H--- accounts for the activities at the sales location and the Customer Support Center on a consolidated basis.

Rather, H--- held the assets in one unified business for which H--- is required to hold a seller's permit. The sale of such assets is not an “occasional sale,” and sales tax applies to the sale.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0388
• Original supporting opinion: 395.0388 PDF

Original ruling text

395.0388

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916)445-6450

March 2, 1987

Mr. J--- S--H--- A---, Ltd.
Computer Division
XXX --- Avenue, Suite XXX
--- ---, CA XXXXX-XXXX
SR --- XX-XXXXXX
Dear Mr. S---:
This is in reply to your September 30, 1986 letter regarding the application of sales tax to sales of equipment by H--- A---, Ltd. (H---). You provided the following facts: “As of 10/1/86 H--- A---, Ltd. Has discontinued operations at our Customer Support Center at XXXX --- Drive, --- ---, CA. We will sell our equipment located there for salvage value to H--- Computer Products (A---), Inc. as of the same date. “H--- A---, Ltd. maintains a seller’s permit number SR --- XX XXXXXX for our location at XXX --- Avenue, --- ---, California for our computer sales operation. The --- --- facility, although owned by us, has never maintained a seller’s permit, since the activity in which they were engaged -- providing warranty maintenance service for disk drives -- is a non-taxable activity.” You believe that, under Sales and Use Tax Regulation 1595, Occasional Sales -- Sale of a Business -- Business Reorganization, the sale of equipment that H--- used at the Customer Support Center is not subject to sales tax. The California sales tax is generally imposed on retailers for the privilege of making retail sales unless the sale is specifically exempt. (Rev. & Tax. Code § 6051.) One such exemption is for “occasional sales” (Rev. & Tax. Code § 6367) which term is defined as including, “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 or permits….” (Rev. & Tax Code § 6006.5, subd. (a).) The issue here is whether H--- held the assets at the Customer Support Center in the course of activities for which H--- is required to hold a seller’s permit. When a person sells assets of a

Mr. J--- S--H--- A---, Ltd.

-2-

March 2, 1987
395.0388

business which the person operates separate from a business which is required to hold the seller’s permit, the sale of such assets is not subject to tax. In this regard, Regulation 1595 provides at subdivision (a)(3), Separate Businesses: “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 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 seller’s 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.” When a service enterprise and a sales business are operated together so as to constitute one business, tax applies to the sales of the assets of the business. (Reg. 1595(a)(5)(B)(2).) You noted that the activities H--- conducted at the Customer Support Center were the warranty maintenance service for tangible personal property (disk drives) which we assume was sold by H---. You also noted that H--- accounts for the activities at the sales location and the Customer Support Center on a consolidated basis. Given such facts, notwithstanding that H--- maintained the Customer Support Center at a separate location from the sales location and did not hold a seller’s permit for the Customer Service Center, we believe that the Customer Service Center was not an entirely separate endeavor from the course of activities for which H--- holds its seller’s permit. Rather, H--- held the assets in one unified business for which H--- is required to hold a seller’s permit. The sale of such assets is not an “occasional sale,” and sales tax applies to the sale. We hope this answers you question; however, If you need further clarification, feel free to write again. Very truly yours,

R. L. Dick
Tax Counsel

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