When a records-storage company made incidental box sales, was its sale of substantially all business assets fully taxable?

Plain-English summary

A records-storage company charged clients monthly per box and made limited storage-box sales. Its request represented redacted annual storage revenues for 1991 and 1992 and $XX,579.00 of box sales from October 1991 through March 1993, about one percent of gross revenue. It sold substantially all assets to an unrelated Delaware corporation on March 3, 1993.

The letter agreed conditionally. Counsel assumed customers could buy storage without boxes and boxes without storage, that neither purchase reduced the other's price, and that the company made no other sales during the 12 months before the asset sale.

On those assumptions, property used in the storage service qualified for occasional-sale treatment. Tax still applied to every asset used in box-selling activity, including cash registers, inventory storage facilities, supplies, and other related property—not merely the 400 boxes transferred.

The request first valued those boxes at approximately $288, then quoted the company's argument using $228. No inventory or allocation record resolves the $60 conflict. The letter also denied section 6596 reliance relief because the sale had occurred and the timely-return deadline had passed.

Completed sale, Regulation 1595 framework, assumptions, and limits

Staff Counsel Donald L. Fillman wrote on November 9, 1993 to P--- M---, president of T--- S--- C---, about redacted account SR--XX-XXXXXX. The president had requested section 6596 advice, but the source gives no request date or copy.

Fillman described section 6596 as the Board's only basis to relieve a person who reasonably relied on incorrect written Board advice responding to a written request with all relevant facts. He said it could not apply because the transaction had already occurred and the deadline for a timely return had passed. The source does not identify the return period, due date, filed return, advice allegedly relied on, assessment, or requested relief.

The company stated that it sold substantially all assets on March 3, 1993 to B--- N---, Inc., an unrelated Delaware corporation. Before the sale it stored records, corporate documents, and other boxed papers, billing monthly per box. It reported approximately $XXX,000 of 1991 revenue and $X,XXX,000 in 1992, supposedly evidenced by enclosed tax returns that are not in the PDF.

As a limited customer courtesy, it sold storage boxes on request. The quoted request calls its permit a resale permit; Fillman later says it properly held a seller's permit. Box sales from October 1991 through March 1993 totaled redacted $XX,579.00, supposedly shown by enclosed sales-tax returns, and were about one percent of gross revenues. The source gives no transaction count, prices, customers, invoices, purchase records, or returns.

The asset sale included 400 storage boxes. The fact statement calls their de minimis value approximately $288; the company's later quoted argument calls it $228. No source record resolves the difference. The company invoked Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811 (1984), and argued that only those boxes should enter the tax measure.

Fillman explained that Regulation 1595 had been amended after Ontario. He quoted subdivision (a)'s rules for permit-requiring activities, acquisition and selling activity, entirely separate businesses, series of sales measured by number, scope and character, incidental sales by service enterprises, repeated service-asset sales, nonservice businesses, and integrated service-and-sales businesses. The quotation also identifies sections 6006 and 6010 and Regulation 1660 for continuing leases, although no lease fact is presented here.

The letter agreed the storage activity would be a service business if it made no sales. It also said the box sales properly required a permit. The remaining question was whether the activities were separate. Fillman presumed storage, related management and billing, and box sales operated at the same location or locations. If they formed one business under Regulation 1595(a)(5)(B)(2), the entire asset sale would involve property used in permit-requiring activities.

Counsel instead applied Regulation 1595(a)(5)(A)(1) only if four assumptions held: storage could be purchased without boxes; boxes could be purchased without storage; neither combination produced a lower price; and no other sales occurred in the preceding 12 months. On those assumptions, storage-service property was exempt under the source's citations to sections 6006.5(b), 6367, and Regulation 1595(a). Property used in box sales remained taxable.

Fillman stressed that the taxable property was not limited to retail box value. It included cash registers, facilities used to store box inventory, sales-related supplies, and any other property related to box sales. The PDF does not identify any such property, its use, value, or allocated sale proceeds.

The source omits the incoming request; section 6596 materials; asset-sale agreement, schedules, price and allocation; corporate records; customer contracts and bills; box invoices; storage and selling locations; management and billing records; permit; enclosed income and sales-tax returns; other-sales ledger; 400-box inventory and conflicting values; cash registers, facilities and supplies; tax return and deadline; audit, assessment, payment, refund claim, Board action, appeal, collection, or later outcome. It does not show how the company reported the sale or whether the assumptions were verified.

The live annotation preserves substantially all assets sold to an unrelated buyer, monthly per-box storage, limited box sales, seller's permit, approximately 99-percent storage revenue, customer-choice and no-discount separation, Regulation 1595(a)(5)(A), and tax limited to box-selling assets. It omits every party, date and amount; section 6596 denial; redacted annual revenues and box receipts; enclosed returns; resale permit wording; 400 boxes and $288/$228 conflict; Ontario; most of the quoted regulatory framework; same-location presumption; management and billing; no-other-sales assumption; sections 6006.5(b) and 6367; cash registers, inventory facilities and supplies; missing records; and absent tax outcome. It states the customer-choice facts affirmatively where the letter expressly labels them assumptions.

What this means for you

Service businesses with small product sales

Under this conditional opinion, incidental sales did not make every service asset taxable, but customer choice, pricing, other sales, locations, management, and actual asset use controlled separation.

Accountants and tax professionals

Identify every asset supporting the selling activity. The taxable pool can extend beyond inventory to registers, inventory facilities, supplies, and other sales-related property.

Common questions

Q: Why was the result conditional?
A: Counsel assumed the storage and box offerings were independently available, had no linked discounts, and box sales were the company's only sales during the prior year.

Q: Were all storage-business assets taxable?
A: No, not if the service activity was separate under those assumptions.

Q: Was tax limited to the 400 boxes sold with the business?
A: No. It also covered other tangible property used in box-selling activity.

Q: Were the 400 boxes worth $288 or $228?

A: The source prints approximately $288 in its fact statement and $228 in the quoted argument. No inventory or allocation record resolves the conflict.

Q: Did the letter provide statutory reliance protection?
A: No. It said the completed transaction and passed return deadline prevented relief under section 6596.

Q: Were storage and box sales proved separate?

A: No. The letter states customer choice, no cross-discounts, and no other prior-year sales as assumptions and supplies no contracts, invoices, prices, or sales ledger.

Q: Which assets besides boxes could be taxable?

A: Cash registers, facilities storing box inventory, sales-related supplies, and any other property used in box sales.

Q: What was the final tax result?

A: The source gives no asset allocation, return, audit, assessment, Board action, or later outcome.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(b), 6367, and 6596
• California Revenue and Taxation Code §§ 6006 and 6010 — quoted inside Regulation 1595's lease discussion
• California Sales and Use Tax Regulation 1595(a)(1)–(5), including (a)(5)(A)(1) and (a)(5)(B)(2)
• California Sales and Use Tax Regulation 1660 — quoted inside Regulation 1595's lease discussion
• Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811 (1984)
• Enclosed 1991 and 1992 tax returns and October 1991–March 1993 sales-tax returns — identified but not included
• Request, reliance, corporate, customer, storage, box-sale, permit, location, management, billing, asset-sale, allocation, inventory, value, selling-asset, return, audit, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official November 9, 1993 Donald L. Fillman letter:

Your situation cannot come within section 6596 since the transaction has already occurred and the time for making a timely return has passed.

We assume that a person could obtain storage without also purchasing the boxes, and that a person could purchase boxes without obtaining storage.

The sale of TSC's property used in the course of its service activities (storage) would be exempt from sales tax.

I note that this amount includes not simply the sales price of boxes sold at retail, but includes any amounts attributable to property used in the course of such activities, including cash registers, storage facilities for the inventory, supplies related to the sales, and any other property related to such sales.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1253
• Original supporting opinion: 395.1253 PDF

Original ruling text

395.1253

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2641

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

November 9, 1993

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

P--- M---, President
T--- S--- C--XXXX --- Avenue
---, CA XXXXX
Re:

SR -- XX-XXXXXX

Dear Mr. M---:
This is in response to your letter regarding the application of sales tax to the sale of a business. Initially, I note that you ask for advice pursuant to Revenue and Taxation Code section 6596. That section provides the Board with the only basis to relieve a person for relying on incorrect advice from the Board. Section 6596 applies when a person reasonably relies on incorrect written advice from the Board in response to a written request for advice that includes all relevant facts. Your situation cannot come within section 6596 since the transaction has already occurred and the time for making a timely return has passed. You explain: "On March 3, 1993, TSC [T--- S--- C---] sold substantially all its assets to B--N---, Inc., a Delaware corporation ('B---') .... "Prior to the Asset Sale, TSC operated a service business which stored records, corporate documents and any other boxed papers for its clients. TSC charged its clients for its services by assessing monthly storage charges per box, grossing revenues of approximately $XXX,000 in 1991 and $X,XXX,000 in 1992 as evidenced by the enclosed tax returns. "As a courtesy, and on a very limited basis, TSC would sell storage boxes to certain of its clients on request. Although, TSC obtained its resale permit to offer this service, TSC's box sales from October 1991 through March 1993 totaled
$XX,579.00 (as evidenced by the enclosed sales tax returns), or approximately one (1%) percent of TSC's gross revenues.

P--- M---

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November 9, 1993
395.1253

"In the Asset Sale, 400 storage boxes with a de minimis value of approximately
$288.00 were sold to B--- with TSC's other assets."
You believe the sale is an exempt occasional sale and you cite the case of Ontario Community Foundation, Inc. v. State Board of Equalization (1984) 35 Cal.3d 811. You argue: "TSC, as described above, also held a resale permit to accommodate its customers by making a minimal number of taxable sales, an activity wholly incidental to its service business. Therefore, as held in Ontario, it would be grossly unfair to assess sales tax against the entire Asset Sale proceeds. Accordingly, as set forth in Regulation 1595 (a) (5), the only Asset Sale proceeds subject to sales tax are those directly attributable to the sale of the tangible personal property, the 400 storage boxes with a value of $228.00, used in the selling activity." After the decision in Ontario Community Foundation, the Board amended Regulation 1595 to conform with that decision. The relevant provisions are as follows: "(a) ACTIVITIES REQUIRING SELLER'S PERMIT. "(1) GENERAL. Tax applies to all retail sales of tangible personal property including capital assets whether sold in one transaction or in a series of sales, held or used by the seller in the course of an activity or activities for which a seller's permit or permits is required or would be required if the activity or activities were conducted in this state.... "Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit. A person who makes a substantial number of sales for relatively small amounts is also required to hold a seller's permit. "Tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a seller's permit unless the sale is one of a series of sales sufficient in number, scope and character to constitute an activity for which the seller is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state. If tangible personal property is leased under a lease which is a 'sale' as defined in Section 6006 or a 'purchase' as defined in Section 6010, tax applies to the lease as provided in Regulation 1660. The lessor is making a 'continuing sale' which is not an 'occasional sale'.

P--- M---

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November 9, 1993
395.1253

"(2) PROPERTY HELD OR USED IN AN ACTIVITY, OR ACTIVITIES REQUIRING THE HOLDING OF A SELLER'S PERMIT. A seller's permit is required of a person engaged in the business of selling tangible personal property. The activity or activities requiring the holding of that permit include, but are not limited to, the acquisition and sale of tangible personal property at retail or for resale. "Acquisition includes the obtaining of the property in any manner whatsoever. For example, raw materials may be purchased or may be obtained by extraction from the earth, air or waters of the earth. These may be sold in raw form or processed or manufactured into other raw materials, component parts or finished items which are sold. Each of these activities is an activity which is so related to the sale of tangible personal property, that it is part of the activity requiring holding of a seller's permit. "(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 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. "(4) SERIES OF SALES REQUIRING THE HOLDING OF A SELLER'S PERMIT. When a person not otherwise engaged in an activity requiring the holding of a seller's permit makes a series of sales sufficient in number, scope and character to require the holding of a seller's permit, the gross receipts from all of such sales are subject to tax. "(A) Number. Generally the minimum number of sales to require the holding of a seller's permit is three within any 12 month period. "(B) Scope. The extent of the sales measured by their frequency or dollar volume.

P--- M---

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November 9, 1993
395.1253

"(C) Character. This relates to the similarity in type and value giving effect to the taxpayer's operations. For example, a processor of food products for human consumption is not required to hold a seller's permit for the processing and sale of food products. Sales of used lug boxes, obsolete or used machinery, food handling and similar items are of a character that three or more sales of sufficient scope will require the processor to hold a seller's permit for this selling activity. "(5) EXAMPLES APPLYING THE ABOVE PRINCIPLES. "(A) Service enterprises which make some incidental sales. "1. Operators of service enterprises such as hospitals, hotels, theaters, schools, laundromats, car washes, transportation companies, and trucking companies may make some sales incidental to their primary services business. A hospital may operate a pharmacy and cafeteria as an adjunct to the hospital. A hotel may operate a restaurant and a bar. A theater may sell popcorn to patrons. A school may operate a cafeteria and bookstore. A laundromat may sell soap to its customers. "If any of these businesses were sold, tax would apply only to the gross receipts from the tangible personal property held or used in the selling activity. "2. If, in any 12 month period, the operator of the service enterprise makes more than two sales in substantial amounts of tangible personal property used in the service enterprise, the gross receipts from those sales is subject to tax, unless otherwise exempt (such as a sale in interstate commerce). If one of the sales is a sale of the business, the tax applies to the gross receipts from the sale of the tangible personal property. In determining whether there are more than two sales of tangible personal property, trade-ins of used equipment for new, incidental to the service enterprise, will not be counted. "(B) Other businesses. "1. Tax applies to the sales of assets of a business which is not essentially a service enterprise. Examples of this are sales of grocery stores and liquor stores selling both exempt food products and taxable items, service stations which sell gasoline, oil and similar items and which also perform automotive repairs and lubrication services, pharmacies which sell exempt medicines and taxable items such as bandages and sundries. "2. Where a service enterprise and a sales business are operated together so as to constitute one business, tax will apply to the sale of the assets of the

P--- M---

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November 9, 1993
395.1253

business. For example, if a car wash and gasoline station are operated at the same premises and the car wash is available only to persons who buy gasoline or if the price of the car wash is reduced if gasoline is purchased, tax applies to the sale of the car wash." We agree that TSC was operating a business which, if no sales were made, would be regarded as a service business the sale of which would qualify as an exempt occasional sale. However, TSC was making sales of tangible personal property, and properly held a seller's permit with respect to such sales. The question to be answered is whether TSC's service activities were conducted in a business that can be regarded as a business separate from its sales activities. Subdivision (a)(5)(B)2. of Regulation 1595, quoted above, applies to this case. TSC presumably operated its service enterprise, the storage activities and related business (including management and billing), at the same location or locations as its sales activities. If the service activities and the sales activities were operated so as to constitute one business, then the sale of the entire business will be regarded as the sale of property used in the course of activities requiring a seller's permit. We assume that a person could obtain storage without also purchasing the boxes, and that a person could purchase boxes without obtaining storage. We also assume that TSC did not provide storage at a lower price to a person purchasing boxes nor did it sell boxes at a lower price to a person obtaining storage. If these assumptions are correct, and if TSC made no other sales in the 12 months prior to the sale to B--- except for sales of boxes, then we believe that subdivision (a)(5)(A)1. of Regulation 1595 applies. The sale of TSC's property used in the course of its service activities (storage) would be exempt from sales tax. (Rev. & Tax. Code §§ 6006.5(b), 6367, Reg. 1595(a).) The sale of TSC's property used in the course of its sales activities are subject to tax. I note that this amount includes not simply the sales price of boxes sold at retail, but includes any amounts attributable to property used in the course of such activities, including cash registers, storage facilities for the inventory, supplies related to the sales, and any other property related to such sales. If you have additional questions, please contact me. Sincerely yours,

Donald L. Fillman
Staff Counsel
DLF:wk