Could a no-profit shell subsidiary keep a separate seller's permit, and did vendor transportation charges enter its resale tax measure?

Plain-English summary

A wholly owned corporation conducted 99 percent of its business with its parent. The submitted facts said it had no employees or bank account, earned no profit on parent business, charged no markup to its parent or accommodation customers, relied on the parent to pay many operating expenses, and generated no revenue for itself. Counsel described it as existing as a corporation “in name only.”

The July 18 request asked only whether the subsidiary should keep transportation charges in its tax measure. Senior Tax Counsel John L. Waid broadened the response to permit status. He cited an attached September 3, 1993 Deputy Director letter that had allowed a separate permit subject to conditions including markup, a broader customer base, customer invoices, employees, accounting systems and bank accounts. CDTFA's published PDF does not include either the request or the attached prior letter.

The newer facts showed no markup, parent-paid expenses, no self-generated revenue and transactions the requester called “pseudo-sales.” Waid said these facts suggested the subsidiary was not, never had been and was not intended to be an independent going concern. He said its sole reason for existence appeared to be redirecting local sales-tax revenue from vendor cities to the redacted city.

Waid referred the letter to the Sales and Use Tax Department and recommended revoking the seller's permit. This was a recommendation based on an “appears” conclusion, not a reproduced revocation, disregard determination or final allocation action.

On the question actually asked, the subsidiary bought tangible personal property ex tax for resale to its parent. Vendors' transportation charges would have entered the tax measure but for the resale exclusion; when the subsidiary resold the items, those charges were business costs included in its measure under section 6012(a)(2). Waid therefore said its state sales-tax reporting was correct. The source supplies no purchase invoice, freight bill, resale invoice, tax measure, return or payment amount.

Source posture and current rule

The live 410.0209 annotation retains the ownership, no-employees/no-bank-account facts, 99-percent parent business, no profit or markup, parent-paid expenses and no self-generated revenue. It then says the Board will not regard the subsidiary as a separate person unless it creates the listed identity and “no seller's permit will be issued,” hardening counsel's recommendation into a categorical disposition. The supporting letter only refers the matter and recommends revocation; no final action is supplied.

The live annotation omits the July 18 transportation question, absent September 3 conditions letter, “pseudo-sales” wording, apparent local-revenue-redirection purpose, permit-revocation referral, section 6012(a)(2), transportation-charge analysis, correct-state-reporting conclusion, missing records and absent outcome.

Current Regulation 1699(i) now addresses related buying companies. It says a company formed solely to redirect local sales tax is not recognized separately for permit purposes and lists operational elements relevant to a contrary finding. The regulation's history shows subdivision (i) was added in 2002, after this letter. It is current context, not proof that every 1993 condition was met or that the 1996 recommendation became final.

The official two-page PDF has a clean native text layer and one small page-1 stencil, so no OCR was required. Both fresh direct PDF downloads and both live-annotation downloads were byte-identical, and the duplicate default PDF text extractions matched. The original-text section remains byte-identical to its committed version and matches the fresh official extraction after removing only the extractor's terminal newline and form feed.

What this means for you

Related corporations, local-tax analysts, and tax professionals

Formal incorporation did not by itself establish operational substance in this opinion. Document employees, banking, accounting, customers, invoices, revenue, pricing, business purpose and local-tax effects under current Regulation 1699(i). Separately track transportation and other resale costs in the correct tax measure.

Common questions

Q: Why did counsel recommend permit revocation?

A: The submitted facts suggested no independent going concern and an apparent local-tax-redirection purpose, while the entity remained outside conditions described in the absent 1993 letter. Counsel recommended revocation; the source does not show final action.

Q: Did it charge a markup?

A: No.

Q: How were vendor transportation charges treated?

A: As business costs included in the subsidiary's gross receipts when it resold the property to its parent under section 6012(a)(2). Counsel said the state sales-tax reporting was correct.

Q: Was permit revocation completed?

A: The source does not say. It records only counsel's referral and recommendation.

Q: Does the live annotation include the transportation answer?

A: No. It retains the separate-entity discussion and omits the question that prompted the opinion.

Citations and references

• California Revenue and Taxation Code § 6012(a)(2)
• Current California Sales and Use Tax Regulation 1699(i) — later buying-company rule added in 2002
• July 18, 1996 request; September 3, 1993 permit-conditions letter; corporate, employee, banking and accounting records; purchases; transportation charges; resale invoices; returns and payments; local allocations; permit referral; revocation decision; and later outcome — described or implicated but not included

Verbatim support

From the official Senior Tax Counsel opinion:

In fact, you refer to LLM's transactions as “pseudo-sales.”

For this reason, I am, by copy of this letter, referring your letter to the Sales and Use Tax Department and recommending that LLM's seller's permit be revoked.

Such charges, then, are one of LLM's costs of doing business included in its measure of tax when it resells the items to LLUMC.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 410.0209
• Original supporting opinion: 410.0209 PDF
• Current cross-reference: Regulation 1699(i)

Original ruling text

410.0209

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-3828
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

November 4, 1996
E. L. SORENSEN, JR.
Executive Director

Mr. A--- N--Sales & Use Tax Analyst
L--- L--- M--XXXXX --- Street
P.O. Box XXXX
--- ---, California XXXXX
L--- L--- M--SR -- XX-XXXXXX
Transportation Charges
Dear Mr. N---:
I am responding to your letter to the Legal Division dated July 18, 1996. You ask for our opinion on whether or not L--- L--- M--- (LLM) should continue to include transportation charges in the measure of tax. You indicate that LLM is related to L--- L--- U--- M--- C--- (LLUMC). As we understand it, however, LLM exists as a corporation in name only. It has no employees of its own and has no bank account. It is wholly owned by LLUMC. Ninety-nine percent of its business is with its parent, and it draws no profit therefrom. In your letter you confirm that LLM charges no markup on sales between LLM “and its customers” (presumably, its parent and its accommodation customers). You further state that “LLUMC pays for much of the expenses to operate LLM, and LLM doesn’t actually generate any revenue for itself.” Based on this information, it is apparent that LLM has failed to comply with the basic requirements for obtaining and holding a seller’s permit. I have attached hereto a copy of a letter dated September 3, 1993, from Robert Nunes, Deputy Director, Sales and Use Tax Department, to Mr. D--- B---, LLUMC’s representative, outlining the conditions under which LLM would be permitted to maintain a separate Sales and Use Tax permit. As stated therein, among those were: (1) adding a mark-up to all sales; (2) expanding LLM’s customer base; (3) invoicing all

Mr. A--- N---

-2-

November 4, 1996
410.0209

customers; and (4) creating a separate identity with employees, accounting systems, and bank accounts. The information you supply indicates that LLM is still not charging a mark-up. In fact, you refer to LLM’s transactions as “pseudo-sales.” Finally, you refer to LLUMC making most of LLM’s expenses and LLM not generating any revenue for itself. LLM is still not in compliance with the terms of the Sales and Use Tax Law and Regulations, thus suggesting it is not, never was, and is not intended to be, an independent going concern. Its sole reason for existence appears to be to re-direct local sales tax revenue from the cities where the vendors’ places of business are located to the City of L--- L---. For this reason, I am, by copy of this letter, referring your letter to the Sales and Use Tax Department and recommending that LLM’s seller’s permit be revoked. To answer your specific question, LLM buys, as noted above, tangible personal property ex tax for resale to LLUMC. Evidently the vendors’ transportation charges are included in the measure of tax which would have been due had not the instant transactions been excluded from tax as being for resale to LLUMC. Such charges, then, are one of LLM’s costs of doing business included in its measure of tax when it resells the items to LLUMC. (Rev. & Tax. Code § 6012(a)(2).) LLM is thus reporting state sales tax correctly. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely,

John L. Waid
Senior Tax Counsel

JLW:sr

cc:

Mr. E.L. Sorensen, Jr. (MIC:73)
Mr. Glenn A. Bystrom (MIC:43)
Deputy Director, Administration Department (MIC:69)
Chief, Return Analysis and Allocation Division (MIC:32)
Mr. Larry Micheli (MIC:27)
Ms. Mary C. Armstrong
Mr. Gary J. Jugum