Could intercompany fixed-asset transfers avoid sales and use tax because no invoices or cash payments were issued?

Plain-English summary

An affiliated food-service company moved assets, including vending machines, among regional operating corporations and recorded debits and credits. It argued the entries merely moved assets among unit inventory listings for personal-property-tax reporting, while all operating entities filed one consolidated federal return. It said no invoice, cash, liability, value, or consideration changed hands.

The audit treated debits for assets acquired from out-of-state vendors as purchase price and credits for California asset transfers as gross receipts. The Appeals recommendation explained that consideration need not be cash or an invoice: a seller's credit and buyer's corresponding debit can create intercompany debt equal to the price.

The Department acknowledged that another explanation might exist, but the petitioner supplied no fixed-asset ledgers, intercompany accounts, capital accounts, general journal, or other supporting documentation. Senior Staff Counsel David H. Levine therefore recommended no adjustment to use tax on acquired assets or sales tax on transferred assets.

The recommendation also left the disputed vending measure unchanged. Calling amounts subcontractor commissions did not establish that they were outside the petitioner's own gross receipts, and the petitioner did not prove the alternative resale-certificate and Board-notice conditions. The PDF contains no final Board action or later outcome.

Audit posture, three disputed items, authorities, and source limits

Senior Staff Counsel David H. Levine issued the Decision and Recommendation on April 28, 1993. Scott A. Lambert, Supervising Tax Auditor, appeared for the Sales and Use Tax Department. The petitioner waived appearance at an Appeals conference held in Sacramento on a redacted 1993 date. The audit period, state and local measures, transit-district measures, petition number, account information, conference date, and nearly every dollar amount are redacted.

Item A concerned ex-tax fixed assets acquired from out-of-state vendors. The audit treated recorded debits as the price of property purchased for California use. The petitioner asserted that the original vendor sale had been taxed, but it did not establish that use tax was paid or that an exemption applied.

Item B concerned ex-tax fixed-asset sales. The auditor excluded property shipped outside California and examined transfers to persons in California, assessing tax where a transfer could not be traced as nontaxable. The petitioner offered the same no-invoice argument.

The petitioner said the M--- corporate family assigned operating regions and moved assets between client contracts and unit inventory listings. It characterized the entries as parent-company reconciliation for personal-property-tax assessment and emphasized consolidated federal reporting. The source supplies no corporate chart, consolidation return, client contracts, asset inventory, location history, invoices, original purchase records, tax-paid proof, transfer agreements, or accounting records.

The petitioner relied on Beatrice Company v. State Board of Equalization for the premise that a sale needs consideration, assumption, or transferred liabilities. The recommendation accepted the need for consideration but found the disputed question was what the entries evidenced. The source prints the then-current Court of Appeal citation 13 Cal.App.4th 69 (1993). The later California Supreme Court opinion in the same matter, 6 Cal.4th 767 (1993), affirmed the Court of Appeal after this recommendation was dated; that later opinion is included here only to reconcile the case identity and reporter history.

The petitioner characterized Annotation 495.0760 as requiring an invoice for a taxable intercompany transfer. Levine said that entry instead found consideration on its particular invoice facts and did not make invoices universally necessary. He also cited Annotation 495.0740, involving corporate equipment transferred for stock that was retired or canceled, and Annotation 495.0780, involving joint-venture property withdrawals and debited advance accounts. Those historical entries illustrate other evidence of consideration; their transactions are not this petitioner's transactions.

The analysis applied sections 6006 and 6010 to transfers of tangible personal property for consideration, section 6051 to California retail sales measured by gross receipts, and section 6201 to California use of property purchased from a retailer. It concluded paired debits and credits generally evidenced intercompany sales and debt. The Department offered to reconsider if fixed-asset general ledgers, intercompany accounts, capital accounts, and the general journal established another explanation. None was provided.

Item C involved amounts first reported and then deducted as understated taxable vending sales. The petitioner could not explain the deduction during audit and later said vending subcontractors gave it commissions that it credited to the client. The source gives no vending agreements, machine ownership, products, locations, sales, proceeds, client credits, commissions, reports, or accounting entries.

Levine used two alternatives. If the petitioner made vending sales while subcontractors maintained the machines and retained 25 percent as fees, section 6012 did not let the petitioner deduct those fees from 100 percent of its receipts. Even if subcontractors were the sellers, Regulation 1574(a)(4) left the petitioner liable for the machine sales because it did not establish valid resale certificates or notice to the Board of the subcontractors' names and addresses. The 25-percent figure is part of counsel's example, not a stated transaction fact.

The recommendation was Redetermine without adjustment. The PDF supplies no audit workpapers, Department documentation request, petition, later petitioner letter or evidence, ledgers, journals, tax-payment proof, exemption claim, transfer tracing, resale certificates, Board notices, conference transcript, redetermination, formal Board decision, payment, refund claim, judicial appeal, collection, or later outcome.

The live annotation preserves the fixed-asset book-entry holding, intercompany debits and credits, consideration, purchase price, gross receipts, and tax conclusion. It omits the petitioner and corporate-family facts; all dates except April 28, 1993; the redacted conference, period, and amounts; the three separate audit items; out-of-state acquisitions and California-transfer screening; original-tax and consolidated-return arguments; missing records and the Department's offer to review them; Beatrice and all three cross-referenced annotations; the entire vending dispute; the no-adjustment recommendation; and the absent final outcome.

What this means for you

Affiliated companies moving equipment

Under this recommendation, consolidated federal reporting and the lack of an invoice did not overcome paired intercompany entries. Preserve the entity, asset, price, tax-paid, location, transfer, debt, and accounting evidence that explains each entry.

Accountants and tax professionals

Reconcile fixed-asset ledgers, intercompany and capital accounts, the general journal, invoices, original tax, transfer agreements, and destination records before asserting that an entry is only administrative.

Common questions

Q: Is an invoice required to prove a taxable intercompany sale?
A: No. The recommendation said debits and credits can independently show consideration.

Q: Could the book entries have had a nontax explanation?
A: The Department expressly acknowledged that possibility and offered to review supporting records, but the petitioner provided none.

Q: Why was use tax upheld on acquired assets?
A: The debits represented purchase price, and the taxpayer did not prove tax payment or an exemption.

Q: Why were the vending amounts also upheld?
A: The petitioner did not document its commission theory. If it was the seller, subcontractor fees did not reduce gross receipts; under the stated alternative, it also failed to establish resale certificates and the required notice.

Q: Did filing one consolidated federal return decide the sales-tax result?

A: No. The petitioner raised consolidation to support its single-entity characterization, but the recommendation focused on what the intercompany entries evidenced and the absence of supporting records.

Q: Did the source prove the original vendors charged tax?

A: No. It records the petitioner's assertion but says the petitioner did not establish use-tax payment for item A.

Q: Was the 25-percent vending commission an actual amount?

A: No. Counsel used 25 percent only in a hypothetical explaining why a seller cannot deduct subcontractor fees from gross receipts.

Q: What was the final outcome?

A: Counsel recommended redetermination without adjustment. The source supplies no final Board action, payment, refund, appeal, or later result.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6010, 6012, 6051, and 6201
• California Sales and Use Tax Regulation 1574(a)(4)
• California Sales and Use Tax Annotation 495.0740, dated August 24, 1953
• California Sales and Use Tax Annotation 495.0760, dated October 25, 1963
• California Sales and Use Tax Annotation 495.0780, dated July 21, 1953
• Beatrice Company v. State Board of Equalization, 13 Cal.App.4th 69 (1993) — citation printed in the source; later California Supreme Court opinion at 6 Cal.4th 767 (1993)
• Audit papers, Department documentation request, petition, and later petitioner letter — described but not included
• Corporate, client, asset, location, invoice, purchase, tax-payment, transfer, ledger, journal, vending, commission, resale-certificate, notice, conference, administrative, payment, appeal, and outcome records — described or implicated but not included

Verbatim support

From the official April 28, 1993 David H. Levine Decision and Recommendation:

This intercompany debt in the amount of the sales price is consideration for the transfer, and the amount of that consideration is subject to sales or use tax unless the sale and use of the property is specifically exempt by statute.

The Department notes that there may be an explanation for the book entries at issue with respect to items A and B other than that they represent consideration paid for sales of tangible personal property.

Since petitioner has not provided such supporting documentation for its contentions, the Department remains of the view that the measure of item A is subject to use tax and that the measure of item B is subject to sales tax.

Redetermine without adjustment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1258
• Original supporting opinion: 395.1258 PDF

Original ruling text

STATE OF CALIFORNIA

395.1258

BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
S--- C--- F--Services, Inc.

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DECISION AND RECOMMENDATION

No. SY --- XX-XXXXXX-010
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Petitioner

The Appeals conference in the above-referenced matter was held by Senior Staff Counsel David H. Levine on --- XX, 1993 in Sacramento, California. Appearing for Petitioner:

Appearance waived

Appearing for the
Sales and Use Tax Department:

Scott A. Lambert
Supervising Tax Auditor

Protested Item
The protested tax liability for the period December 27, 19XX to December 27, 19XX is measured by: State, Local and County

Transit
Districts

$ XX,XXX

$ XX,XXX

X,XXX

XX,XXX

C. Taxable vending sales understated

XXX,XXX

XXX,XXX

TOTAL

$XXX,XXX

$ XXX,XXX

Item
A. Extax fixed asset acquisitions
from out-of-state vendors
B. Extax fixed asset sales

Petitioner's Contentions
Petitioner contends that audit items A and B were intercompany transfers which were not invoiced and were therefore not sales. Petitioner contends that the amounts in audit item C were

S--- C--- F--- Services, Inc.
SY --- XX-XXXXXX-010

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395.1258

commission revenues and that no sale occurred.
Summary
The audit disclosed amounts recorded as debits in connection with property acquired for use in California. The Sales and Use Tax Department (Department) regarded these debits as the purchase price of property purchased for use in California. Since petitioner did not establish that use tax had been paid with respect to such amounts, the Department assessed use tax measured by the amount of the debits. This assessment is represented by item A. In its petition, petitioner characterizes Business Taxes Law Guide Annotation 495.0760 as stating that an invoice must be issued and tax must be paid on that invoice price. Based on this, petitioner contends that sales tax is not due since no invoice was issued with respect to these intercompany transfers. The audit disclosed amounts recorded as credits in connection with property transferred to other persons. The Department regarded these credits as petitioner's gross receipts from the sale of property. The audit papers indicate that the auditor excluded all property shipped outside California, examining only those transfers of property to persons in California. The Department regarded these as sales of property in California, and assessed sales tax with respect to those transfers for which the auditor could not trace to a nontaxable transfer. This assessment is represented by item B. The petition includes the same argument for tax not applying to these amounts as asserted with respect to item A. The amounts represented by item C were reported by petitioner and then deducted. Petitioner could not explain the reason for the deduction during the audit. In its petition, petitioner states that these amounts were commissions given to petitioner by vending subcontractors and then credited to the client. Prior to the setting of the Appeals conference, the Department requested additional documentation from petitioner to support its assertions, but no additional documentation was provided. Petitioner waived appearance at the Appeals conference, but indicated that it wished to submit additional evidence or arguments. Petitioner has not submitted any additional evidence, but it has submitted a letter which included additional arguments. Petitioner explains that it acquires various assets, such as vending machines, with respect to food service provided to its clients. Assets acquired for use on one client's contract may thereafter be transferred for use with respect to a different client's contract. The location to which the assets are moved or relocated may be within the region of a different operating corporation. That is, apparently the M--- family of corporations have specific regions in which each operates, and the book entries in question here arise when assets are transferred by (or to) petitioner to (or from) a company in a region in which petitioner does not operate. Petitioner asserts that sales tax was paid when the sale was made by the original vendor. It contends that the tax assessed by the Department is an imposition of double taxation on a mere consolidating M--- Corporation (presumably its parent) reconciliation entry. Petitioner states:

S--- C--- F--- Services, Inc.
SY --- XX-XXXXXX-010

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“In order to accurately reflect the ‘Asset Inventory’ of each S--- C--- F--- Service unit location for personal property tax assessment it is necessary for us to move or ‘transfer’ the booked assets from one unit inventory listing to another unit inventory listing. This bookkeeping entry to record the movement or relocation of assets between operating locations has been misinterpreted by the board as a ‘transfer’ of assets between corporations for a consideration as a taxable transaction. “In the instance where an asset moves from one operating location to another no value, liability, or consideration are ever exchanged. “It is imperative to understand at this point that all operational entities associated with M--- Corporation I.E. S--- C--- F--- Service, S--- S--Corporation, M--- M--- Services Corp. etc. are all consolidated and reported onto one Federal Income Tax return under M--- Corporation (FEI XX-XXXXXXX). “No change in cash or corporate liabilities would be transferred or sold within M--- as one corporate entity for any asset movement or relocation.” In addition to the argument quoted above, petitioner also cites Beatrice Company v. State Board of Equalization (1993) 13 Cal.App.4th 69 for the proposition that “some form of consideration, assumption or transfer of liabilities is required in exchange for the transfer of assets to incur a state sales tax liability.” (Emphasis omitted.) Analysis and Conclusion A retailer's retail sale of tangible personal property in California is subject to sales tax measured by gross receipts unless that sale is specifically exempt by statute. (Rev. & Tax. Code
§ 6051.) The use in California of tangible personal property purchased from a retailer for use in California is subject to use tax unless that use is specifically exempt by statute. (Rev. & Tax. Code § 6201.) “Sale” is defined for purposes of the California Sales and Use Tax Law to include any transfer of tangible personal property for a consideration. (Rev. & Tax. Code § 6006.) Similarly, “purchase” is defined to include any transfer of tangible personal property for a consideration. (Rev. & Tax. Code § 6010.) Petitioner asserts that no money changed hands. However, “consideration” is not limited to the physical transfer of money. For example, a seller of tangible personal property may enter the amount of the sales price of that property in its records as a credit owed by the purchaser, and the purchaser may enter in its records a corresponding debit owed to the seller. This intercompany debt in the amount of the sales price is consideration for the transfer, and the amount of that consideration is subject to sales or use tax unless the sale and use of the property is specifically exempt by statute.

S--- C--- F--- Services, Inc.
SY --- XX-XXXXXX-010

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Petitioner characterizes Business Taxes Law Guide Annotation 495.0760 (10/25/63) as stating that tax would only apply to a transfer of property between wholly-owned subsidiaries if an invoice were issued. The annotation, however, deals with a specific transaction where property was transferred and an invoice for that property was issued. The invoiced amount was regarded as the sales price of the property. The annotation does not stand for the proposition that a transfer of tangible personal property in exchange for consideration is taxable only if an invoice showing that consideration is issued. Rather, the annotation dealt with the specific question of whether the facts in that case established that consideration was transferred, and the answer was yes. The annotation does not state that only the facts on which it was based will lead to a finding that consideration was transferred. (See, e.g., BTLG Annots. 495.0740 (8/24/53), 495.0780 (7/21/53).) Petitioner also cites Beatrice in support of its position. Petitioner is correct in asserting that without the payment of consideration, there is no sale, and that if there is no sale, there is no sales tax. The Department has not contended otherwise. Rather, the Department contends that the book entries it discovered show that petitioner incurred intercompany debts with respect to purchases of property and that petitioner realized intercompany credit with respect to sales of property. That is, the Department contends that there was consideration paid with respect to the transactions at issue. Thus, the question remains whether petitioner gave consideration for property it acquired (item A) or received consideration for property it transferred (item B). The Department notes that there may be an explanation for the book entries at issue with respect to items A and B other than that they represent consideration paid for sales of tangible personal property. At the conference, the Department's representative indicated that if petitioner provided further documentation, the Department would review it and advise me if that documentation established to the Department's satisfaction that the book entries did not represent consideration paid to petitioner by transferees, or consideration paid by petitioner to transferors. Relevant documentation would consist of claimant's general ledger accounts for fixed assets, intercompany accounts, the capital accounts, and the general journal. Since petitioner has not provided such supporting documentation for its contentions, the Department remains of the view that the measure of item A is subject to use tax and that the measure of item B is subject to sales tax. The type of book entries identified by the Department during the audit generally represent intercompany credits and debits in connection with the intercompany sale of tangible personal property. That is, these book entries are sufficient evidence to support the Department's position that sales of tangible personal property were transferred for consideration. Since petitioner has provided no documentation to the contrary, I conclude that the amounts in item A represent the sale price of property purchased by petitioner for use in California. Petitioner has not argued that the use of such property is exempt from use tax, nor does it appear that any exemption is applicable. Petitioner has also failed to establish that use tax was paid with respect to item A. I therefore conclude that petitioner owes use tax on such amounts.

S--- C--- F--- Services, Inc.
SY --- XX-XXXXXX-010

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Similarly, I conclude that the amounts in item B represent petitioner's receipts from the sale of tangible personal property in California. Since petitioner has not established that such sales were exempt or that it paid sales tax with respect to such amounts, I conclude that it owes sales tax on the amounts included in item B. Petitioner contends that the amounts included in item C are commissions and are therefore not from sales. Assuming such amounts are commissions, it does not necessarily follow that they are not from sales. An example would be if petitioner hired subcontractors to maintain vending machines from which petitioner made sales and the subcontractors retained 25 percent of the proceeds as their fees (“commissions”), remitting the remainder to petitioner. In this example, petitioner is the seller of the property and must report 100 percent of its receipts from the vending sales. It is not allowed a deduction of the 25 percent commission paid to the subcontractors. (Rev. & Tax. Code § 6012.) I note that even if the subcontractors were themselves the sellers of the items dispensed by the vending machines, petitioner would nevertheless be liable for tax measured by the total sales from those machines since petitioner has not established that it took valid resale certificates from those subcontractors and notified the Board of their names and addresses. (Reg. 1574(a)(4).) Since petitioner has provided no documentation to establish its contention that the amounts included in item C are not gross receipts from the sale of tangible personal property, I have no basis to reach any other conclusion. Recommendation Redetermine without adjustment.

David H. Levine
Senior Staff Counsel

Date