Did section 6006.5(b)'s substantially-all requirement apply separately to one selling activity or business segment?

Plain-English summary

An attorney asked about M--- D--- Co.'s property transfer. Board staff first rejected the general premise that selling the same merchandise to jobbing and retail customer classes created two distinct activities. The enterprises had to be clearly proved separate, not merely capable of separation.

Tax Counsel Philip R. Dougherty nevertheless assumed, solely to answer the question, that the company had two separate business activities at exactly 11:58 p.m. on June 30, 1973. Even then, it had not transferred all or substantially all property held or used across those activities.

Staff read the statutory plural activities to require all or substantially all assets held or used in every selling activity, rather than the assets of one among several separate activities.

The seller's-permit reference identified the relevant activities but did not divide them. Dougherty said a permit was issued for each place of business, not separately for every activity conducted there. The source does not identify any transferred asset, activity, location, permit, transaction term, tax amount, or outcome.

Staff position, statutory wording, exact-time assumption, and source limits

Philip R. Dougherty wrote on May 13, 1974 to attorney H--- J. H--- about M--- D--- Co. and a redacted seller's-permit account. He responded to a May 6 letter, referred to the client's situation as before, invited further comments, and marked the outgoing letter as having enclosures. The request, prior correspondence, and enclosures are absent.

Staff said it repeatedly encountered claims that wholesale and retail activity in the same merchandise were distinct. Dougherty used jobbing customers and retail customers as the example and emphasized the strength of staff's opposition unless evidence clearly proved separate—not just separable—enterprises. The source identifies no merchandise, customer, pricing, sales channel, personnel, books, facility, or operational evidence for this company.

For purposes of the legal question only, Dougherty assumed M--- D--- Co. had two separate activities at 11:58 p.m. on June 30, 1973. That precision appears in the source without explanation. He stated the company did not transfer all or substantially all property held or used in those activities, but supplies no transfer date, buyer, property, value, retained assets, percentage, agreement, consideration, or calculation.

The interpretive issue turned on section 6006.5(b)'s wording. Counsel contrasted the actual plural in the course of such activities with hypothetical singular formulations such an activity or any such activity. In staff's view, the actual text required substantially all assets across all selling activities.

He separately said seller's-permit references identified which activities counted but did not establish their boundaries. A permit attached to each place of business where the permittee expected to conduct business, not to each distinct activity. The source gives no place of business, permit copy, registration, application, activity listing, or location analysis.

The PDF supplies no May 6 request, prior exchange, enclosures, company facts beyond its name and account, merchandise, customers, operational-separation evidence, asset inventory, transfer instrument, property value, retained-property pool, percentage calculation, buyer, consideration, permit, location, return, audit, assessment, payment, refund, administrative decision, appeal, or later outcome.

The live annotation preserves the substantially-all interpretation, same-merchandise customer classes, one-activity position, alternative two-activity assumption, and all-selling-activities conclusion. It changes the source's example from jobbing customers to wholesale customers. It omits the attorney, company and account; May 6 request, prior exchange and enclosures; staff's repeated resistance and separate, not just separable standard; exact June 30, 1973 time; statutory singular/plural comparison; permits by place of business; every missing transaction record; and absent tax or administrative outcome.

What this means for you

Businesses selling through multiple channels

Under this letter, customer classes for the same merchandise did not automatically create distinct enterprises, and transferring one channel's assets did not satisfy the cross-activity property test.

Accountants and tax professionals

Inventory assets across every selling activity and document whether claimed enterprises are operationally separate. Permit records alone did not delimit activities under this historical view.

Common questions

Q: Were wholesale and retail sales automatically separate activities?
A: No. The staff opposed that view when the business sold the same merchandise to different customer classes.

Q: What assets had to be transferred under the opinion's reading?
A: All or substantially all assets held or used across all selling activities.

Q: Did a seller's permit delimit each separate activity?
A: No. The letter said permits identify activities but are issued for each place of business, not for each activity.

Q: Did staff decide that M--- D--- Co. actually had two activities?

A: No. Counsel expressly assumed two activities only to answer the statutory question.

Q: What happened at 11:58 p.m. on June 30, 1973?

A: The source uses that exact time as the assumed status point but provides no explanation, transaction record, or surrounding chronology.

Q: What property did the company transfer?

A: The letter does not identify it. It states only that the transfer did not cover substantially all property used across the assumed activities.

Q: What was the tax or administrative outcome?

A: The source supplies no tax amount, assessment, decision, payment, refund, appeal, or later result.

Citations and references

• California Revenue and Taxation Code § 6006.5(b)
• May 6 attorney letter, prior exchange, and enclosures — identified but not included
• Company, merchandise, customer, enterprise, operations, location, permit, asset, transfer, value, retained-property, percentage, consideration, return, tax, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official May 13, 1974 Philip R. Dougherty letter:

We oppose such a conclusion. This is mentioned not in the belief that our established opinions should be more convincing from your point of view but because it should indicate the strength of our resistance to such a conclusion unless the activities are clearly proved to be separate, not just separable, enterprises.

But the section as it reads, in our opinion, requires all or substantially all the assets held or used in all selling activities to be sold rather than all or substantially all of the assets held or used in the course of one of several, separate, selling activities.

Please note that the reference to permits in Section 6006.5 is to identify the activities and not to delimit them. A permit is not for a separate activity but is for each place of business at which the permittee expects to conduct his business.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1381
• Original supporting opinion: 395.1381 PDF

Original ruling text

STATE OF CALIFORNIA

395.1381

STATE BOARD OF EQUALIZATION

May 13, 1974

Mr. H--- J. H--H---, ---, --& --Attorneys at Law
XXXX --- Blvd., Suite XXX
--- ---, CA XXXXX

Dear Mr. H---

Re:

M--- D--- Co.
SR -- XX XXXXXX

Before coming to the question raised in your letter of May 6, I should explain that the staff opposes the view that a business which sells merchandise to two classes of clientele (such as jobbing customers and retail customers) is engaged in two distinct activities for the purposes of Section 6006.5. We are repeatedly presented with the argument that a business’ wholesale activity is distinguished from its retail activity in the same type of merchandise. We oppose such a conclusion. This is mentioned not in the belief that our established opinions should be more convincing from your point of view but because it should indicate the strength of our resistance to such a conclusion unless the activities are clearly proved to be separate, not just separable, enterprises. But assuming, for the purposes of addressing your question, that M--- D--- Co., had two separate business activities at 11:58 p.m., June 30, 1973, it did not transfer all or substantially all of the property held or used by it in the course of such activities. In other words, the point you raise would be supported by the statute if Section 6006.5(b) read “in the course of such an activity” or “in the course of any such activity.” But the section as it reads, in our opinion, requires all or substantially all the assets held or used in all selling activities to be sold rather than all or substantially all of the assets held or used in the course of one of several, separate, selling activities.

Mr. H--- J. H--(SR -- XX XXXXXX)

-2-

May 13, 1974
395.1381

Please note that the reference to permits in Section 6006.5 is to identify the activities and not to delimit them. A permit is not for a separate activity but is for each place of business at which the permittee expects to conduct his business. As before, I would be happy to receive your comments on your client’s situation. Very truly yours,

Philip R. Dougherty
Tax Counsel

1b
Enclosures