Could household-goods carriers sell packing materials to the United States using a hundredweight charge without tallying each item?

Plain-English summary

California said pricing packing materials by total shipment hundredweight did not require carriers to tally every container and item. With the required contract structure, materials became identified to a contract when withdrawn from inventory for that job.

The carrier still needed all Regulation 1630 conditions: an express sale to the federal customer with title passing before use, a separate charge, and no understanding or trade custom of return for reuse. Without pre-use title, the carrier consumed materials in moving service. The source had no actual contracts, so it made no carrier-specific determination.

DOD arrangement, hundredweight issue, and missing carrier contracts

The redacted requester arranged household-goods shipments for military and civilian DOD employees west of the Mississippi. It apparently did not move goods itself, instead contracting with private household carriers. A redacted carrier representative had reported that many members were being assessed on container and packing-material sales. None of the entities, authority, carriers, assessments or shipments is supplied.

For ease of calculation, requester-carrier contracts charged for containers and packing materials by total shipment hundredweight. The requester admitted the United States sometimes paid for containers and materials it did not receive. It asked whether that method was enough or each item had to be tallied.

Senior Tax Counsel E. L. Sorensen, Jr. described sale, retail sale and use under sections 6006(a), 6007 and 6009; ordinary retail tax under section 6051; federal-sale exemption under section 6381; identification and title under Commercial Code section 2401; and sale location under section 6010.5. The source quotes no current contracts or transaction evidence.

Three Regulation 1630 conditions, title history, and service alternative

Regulation 1630(b)(2) required three conditions: an express carrier-customer container sale with title passing before use, a separate charge, and no return-for-reuse understanding or custom. With all three, the carrier could give its supplier a resale certificate and its sale to the United States could qualify under section 6381.

Sternoff v. State Board of Equalization, 103 Cal.App.3d 828, resolved to the named California Court of Appeal case and was cited for Regulation 1630's validity.

No carrier contract accompanied the request, so Sorensen could not classify actual carriers. His experience was that similar taxpayers met separate-charge and no-return requirements but failed pre-use title. He understood that the United States did not wish to accept title before carrier use for unknown reasons. No government policy or negotiation record is supplied.

Without the title term, sale to the carrier was taxable retail and packing use defeated resale holding. Title transferred to the requester only at destination after physical delivery. That incidental transfer was itself nontaxable because the true object of the carrier contract was moving service, and Regulation 1501 treated incidental property as consumed by the service provider.

The source says Regulations 1630 and 1501 were enclosed, but the official PDF includes neither.

Contract identification, no tally, approved language, and absent outcome

Sorensen said materials generally became identified to a particular contract when the carrier withdrew them from inventory for that job. That satisfied Commercial Code section 2501 regardless of hundredweight pricing. If all three Regulation 1630 conditions also existed, sale to the carrier was for resale and sale to the federal customer was exempt; no per-item tally was required.

The Board had accepted a pre-packing clause stating: Customer agrees that title to all packing material passes to customer before any use of such material is made. The source does not say any carrier used that clause, when a customer accepted it, or which materials were withdrawn.

The live 400.0224 annotation preserves job withdrawal, contract identification, no-tally result, three-condition premise, federal exemption and past absence of government title terms. It omits the DOD geography and employee groups, carrier association and assessments, admitted charges for unreceived materials, statutory framework, Sternoff, destination/service alternative, missing enclosures and absent carrier-specific outcome.

The official three-page PDF has a clean rendered text layer and only a small seal image. Two fresh downloads and extractions matched exactly, and the preserved source tail remains byte-identical after removal of only pdftotext's terminal newline and form feed.

What this means for you

Household-goods carriers and federal contractors

Hundredweight pricing did not itself defeat container resale, but inventory identification was only one requirement. Obtain an accepted pre-use title clause, charge separately, rule out returns and retain job-level withdrawal evidence.

Accountants and tax professionals

Test the carrier purchase and federal customer sale as separate steps. Preserve actual contracts, title timing, inventory records, charges, resale certificates, federal status and assessment calculations; this source decided none of the reported audits.

Common questions

Was a per-item tally required?

No, if materials were identified to the job on withdrawal and all three Regulation 1630 conditions were satisfied.

When were materials identified to the contract?

Generally when the carrier withdrew them from inventory for the particular job.

What title language had the Board accepted?

Customer agrees that title to all packing material passes to customer before any use of such material is made.

What happened without a title-before-use clause?

The carrier's purchase was taxable and it consumed the materials in moving service; later destination transfer was incidental to that service.

Did counsel approve the existing DOD contracts?

No. No carrier contract was supplied, so the letter made no actual retailer or exemption determination.

Did the United States always receive every charged material?

No. The requester said there were occasions when hundredweight pricing charged the United States for containers and materials it did not receive.

Were the reported carrier assessments resolved?

The source gives no carrier, measure, audit, assessment disposition, payment, claim or appeal outcome.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6007, and 6009 — sale, retail sale, and use definitions quoted
• California Revenue and Taxation Code sections 6010.5, 6051, and 6381 — place of sale, general tax, and federal-government exemption discussed
• California Sales and Use Tax Regulation 1630(b)(2) — container-sale conditions quoted and applied
• California Sales and Use Tax Regulation 1501 — incidental property consumed in a service discussed
• Uniform Commercial Code sections 2401 and 2501 — title passage and contract identification discussed
• Sternoff v. State Board of Equalization, 103 C.A. 3d 828 — cited for the regulation's validity
• June 9, 1989 request and carrier contracts — referenced but not included
• Enclosed Regulations 1501 and 1630 — referenced but not reproduced
• Requester, carrier association and carriers; DOD employees and shipments; containers and materials; inventory withdrawals; contract terms and title; charges and invoices; return practices and resale certificates; assessment measures and rates; returns; audits; payments; claims; appeals; and outcomes — described or implicated but not included

Verbatim support

From the official July 21, 1989 letter:

Your letter did not include any of the carrier contracts so we cannot comment on whether or not pursuant to them the carriers are to be treated as consumers or retailers of the items in question.

Such withdrawal, in our view, satisfies the Uniform Commercial Code identification requirements (See UCC 2501) and, assuming the three requirements of Regulation 1630 were met, the sale to the carrier would be for resale and the sale to [M] would be an exempt retail sale to the U. S. Government.

The carrier would not have to tally every single container and all packing material used on a particular job.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 400.0224
• Original supporting opinion: 400.0224 PDF

Original ruling text

400.0224

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-8485

July 21, 1989

This is in response to your letter of June 9, 1989 to Ms. Cindy Rambo, the Board’s Executive Director. We understand that [M] arranges for the shipment of household goods for all military and civilian Department of Defense (DOD) employees located west of the Mississippi River. Apparently, [M] does not itself move the goods but, rather, contracts with various private household carriers to provide those services. Recently, the [C], which represents the carriers, contacted [M], indicating that many of their members were being assessed tax under the California Sales and Use Tax Law for sales of containers and packing materials utilized in moving DOD employees’ household goods. You stated that for “ease of calculation,” the contracts between [M] and the carriers provide that on every shipment the charge for containers and packing materials is based upon the hundred-weight of the total shipment. You state that, “...[t]he reality of this contracting practice is that there are occasions where the United States is charged for containers and packing materials which it does not receive.” Your specific question is: “Is it sufficient that the carriers charge the United States based on the hundred-weight of the shipment or must the carrier specifically tally every single container and all the packing material used?” Before answering your question, we will briefly outline and discuss the relevant legal principles and authorities. “Sale” is defined in part to mean a transfer of title of tangible personal property for a consideration (Rev. & Tax. Code S 6006(a)). “Retail sale” is defined to include a sale for any purpose other than resale in the regular course of business (Rev. & Tax. Code
§ 6007). “Use” is defined to include the exercise of any right or power over tangible personal property incident to its ownership (Rev. & Tax. Code § 6009). Generally, unless specifically exempted by statute, a retail sale of tangible personal property in California is subject to sales tax (Rev. & Tax. Code § 6051). One of the exemptions of interest to this discussion is the exemption of sales to U. S. Government entities such as [M] (Rev. & Tax. Code S 6381). Under Section 2401 of the Uniform Commercial Code, title to goods cannot pass under a contract of sale prior to their identification to the contract and, title passes to the buyer and the sale takes place at the time and place at which the seller completes his performance with reference to the physical delivery of the goods unless there is an explicit

Mr. --- -. ---

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July 21, 1989
400.0224

agreement of title passage at an earlier time. Consistent with section 2401 is Revenue and Taxation Code Section 6010.5, which states that the place of sale is the place where the goods are physically located at the time the act constituting the sale takes place. Regulation 1630 (copy enclosed), with which your letter indicates you are familiar, embodies the foregoing legal principles in providing the conditions under which packers, loaders, and shippers are considered consumers or retailers of containers or container materials. The regulation provides in pertinent part: “(2) PROPERTY USED AS CONTAINERS OR PARTS OF CONTAINERS OF GOODS SHIPPED. When the shipper is not the seller of the contents, the sale of the containers or container materials or parts to the shipper is a taxable retail sale unless the shipper expressly contracts with his customer for the sale to his customer of the container or container material, making a separate charge therefore, with title passing from the shipper to his customer before any use of the material is made, and without any understanding or trade custom that the property will be returned to the shipper for reuse. When all of these conditions exist, the shipper may purchase the property for resale by giving a resale certificate to the supplier of the property. The sale of the property by the shipper is taxable unless exempt as a sale to the United States, as a sale in interstate or foreign commerce, or exempt for any other reason.” As can be seen, the regulation requires that three conditions must exist in order for a sale of containers and container materials to the carriers be considered a non-taxable sale for resale with the subsequent exempt retail sale occurring upon the sale of these items to [M]. Those conditions are: (1) the carrier expressly contracts with [M] for the sale to [M] of the container or container materials with title passing from the carrier to [M] prior to any use of the items; (2) the carrier makes a separate charge for the materials, and; (3) there is no understanding or trade custom that the container or container materials will be returned to the shipper for reuse. The California Appellate Court has upheld the validity of these provisions of the regulation (Sternoff v. State Board of Equalization, 103 C.A. 3d 828). Your letter did not include any of the carrier contracts so we cannot comment on whether or not pursuant to them the carriers are to be treated as consumers or retailers of the items in question. However, our experience in the past with similarly situated taxpayers has indicated that, although the second and third requirements of Regu1ation 1630(b)(2) have been met, the first requirement has not. Our understanding is that the U. S. Government, for reasons not known to us, does not wish to accept title to the containers and container material prior to use by the carriers in packing and shipping the goods. Absent an express title-passing provision in the contract which passes title prior to usage, a taxable retail sale occurs upon sale of the containers and container materia1s to the carriers. Their utilization of these items in packing and shipping the DOD employees’ goods constitutes a use by the carriers inconsistent with a mere holding of the items for resale in the regular course

Mr. --- -. ---

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July 21, 1989
400.0224

of business. Without a title-passage clause, title to the items in question would not transfer to
[M] until the carrier completed its performance with reference to the physical delivery of the goods, i.e., when the DOD employees’ household goods were delivered at destination. Such transfer is never considered to be taxable (whether to the U.S. Government or any other entity) since we view the true object of the carrier/ contract to be for moving services, not for the sale of tangible personal property. Pursuant to Regulation 1501 (copy enclosed), property transferred incidental to such services is deemed to be consumed by the service provider in rendering its services. Turning now to your specific question, it would seem that the items in question generally would become identified to the contract at the time the carrier commits them to the contract by withdrawing them from inventory for utilization on that particular job, notwithstanding the pricing mechanism used by the parties (e.g., price based on hundred-weight). Such withdrawal, in our view, satisfies the Uniform Commercial Code identification requirements (See UCC 2501) and, assuming the three requirements of Regulation 1630 were met, the sale to the carrier would be for resale and the sale to [M] would be an exempt retail sale to the U. S. Government. The carrier would not have to tally every single container and all packing material used on a particular job. Finally, we note that the following language contained in contract documentation executed prior to the packing operation has been accepted by us as sufficient to convey title prior to usage by the carrier: “Customer agrees that title to all packing material passes to customer before any use of such material is made.” We hope this has answered your questions. If it has not, or if additional information is needed, feel free to contact us again. Sincerely,

E. L. Sorensen, Jr.
Senior Tax Counsel
ELS:jb
cc:

Mr. Gary J. Jugum
Mr. Donald J. Hennessy
Mr. Glenn A. Bystrom