Was a custom-machine developer a California seller and retailer after making only one retail sale during a twelve-month period?

Plain-English summary

The memorandum rejected the idea that one tangible-personal-property sale automatically makes someone a seller. Instead, seller status turns on whether the person entered the business of selling. A new hardware store could be in that business before attracting a customer, while a single sale by itself would not establish the point.

The custom-machine developer was nevertheless a seller. Its contract covered an onion-processing machine and contemplated at least four more machines if the purchaser approved the first. That evidence showed an intent to enter the selling business, rather than merely render research and development services or make an isolated sale.

The memorandum also rejected the former annotation's suggestion that a seller might owe no tax until later becoming a retailer. Section 6015 had been changed in 1949 to define a retailer as every seller making any retail sale. Thus, once the developer was classified as a seller, its retail sale made it a retailer at that time.

This October 16 memorandum and the October 23 letter supporting Annotation 480.0251 concern the same former Annotation 515.0620. Both identify the contemplated additional machines as the basis for seller status and explain why the older retailer analysis was misleading.

What this means for you

Custom manufacturers, startup retailers, auditors, and tax professionals

Look beyond the number of completed transactions. Contracts for follow-on units, opening a retail operation, and other evidence of intent can show that a person is in the selling business. If that seller then makes a retail sale, the opinion treats the person as a retailer for that transaction.

Common questions

Q: Did the first machine sale alone make the developer a seller?

A: No. The memorandum expressly said a single sale alone was not enough.

Q: What established seller status here?

A: The contract contemplated at least four additional machines if the first satisfied the purchaser, showing entry into the business of selling property.

Q: Could someone be a seller before making a sale?

A: Yes. The memorandum used a newly opened hardware store without customers as an example of a person already in the selling business.

Q: When did a seller become a retailer?

A: Whenever that seller made a retail sale under the post-1949 wording of section 6015.

Citations and references

• California Revenue and Taxation Code §§ 6014 and 6015

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 480.0400
• Original supporting opinion: 480.0400 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Ms. Shirley Johnson
Audit Evaluation and Planning

From:

David H. Levine
Senior Tax Counsel

Subject:

Annotation 515.0620

480.0400

Date:

October 16, 1992

The back up memorandum to Annotation 515.0620 indicates that a person who contracted to design a machine to process onions was a seller because the contract was for the sale of a specific item of tangible personal property as opposed to the "mere rendition of research and development services." This, of course, is not enough. A single sale of tangible personal property does not a "seller" make, without regard to whether R & D is involved. This does not mean that I disagree with the annotation's conclusion that the person was a seller, but the reason that conclusion was correct is that the contract shows that the person in question was going into the business of selling tangible personal property. For example, here if the purchaser was satisfied with the first machine, the contract contemplated that the purchaser would purchase at least four more machines. I believe that this

• is sufficient to conclude that the
  purchaser was in the business of selling tangible personal property, that is, a seller, but that is not what the annotation indicates. Further, even if the person had no contract at all, he or she could still be in the business of selling tangible personal property if that was the person's intent (e.g., a new hardware store, open for business but as of yet lacking any customers, is nevertheless in the business of selling tangible personal property). A more serious problem is the conclusion with regard to whether the person in question was a retailer. The annotation states that, although the person was a seller required to hold a seller's permit, it would not be liable for tax unless and until it became a retailer. To be charitable, this makes no sense at all, unless, of course, the conclusion is based on Revenue and Taxation Code section 6015 as it existed prior to 1949. At that time, section 6015 defined retailer as "[e]very person engaged in the business of making sales at retail.... " Perhaps this means what the annotation says, but the annotation was written 16 years after this provision was changed to its current wording: "Every seller who makes any retail sale .... " Thus, once we conclude that a person is a seller, that person is automatically a retailer whenever he or she makes a retail sale. Since the annotation seems to be contrary to this, or at a minimum is thoroughly confusing, it should be deleted.

The explanation for deletion could simply be that parts are confusing and parts are wrong.

cc:

Mr. Gary J. Jugum
Mr. Donald Fillman
Mr. Robert Owens