Did equipment delivered to an out-of-state buyer's agent in California become an exempt interstate sale on approval because acceptance occurred later outside California?
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This page answers the general question as of 1996. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
A seller transferred a machine to its New York customer's agent in California. The agent took the machine to an out-of-state university for testing and later delivered it to the New York buyer. The seller argued that the transaction was an exempt interstate sale on approval because acceptance occurred outside California.
California rejected that position. A true sale on approval required the buyer to have an unconditional right to return the goods even when they met the contract specifications. The one-year warranty allowed return for defects, not for any reason, and therefore did not create sale-on-approval treatment.
Because possession passed to the buyer's agent in California while the seller retained title as security, the transaction was a conditional sale under section 6006(e), not an exempt sale deferred until out-of-state approval.
Common questions
Did later testing or acceptance outside California control the sale date?
No. The contract did not satisfy the source's sale-on-approval requirements.
What return right was necessary?
The buyer needed an unconditional right to return conforming goods, not merely a warranty remedy for defective equipment.
What contract terms can prevent sale-on-approval treatment?
The source listed payment at signing, seller title retention until final payment, a return right limited to nonconforming goods, and buyer acceptance of risk of loss as examples.
Citations and references
- California Revenue and Taxation Code section 6006(e)
- California Sales and Use Tax Regulation 1628(b)(3)(C)
- Uniform Commercial Code sections 2-326 and 2-327
- Original audit memorandum dated April 3, 1981; Legal Division adoption dated July 10, 1996
Source
- Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
- Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/495-0000-all.html
- Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/495-0130.pdf
Original ruling text
State of California
Board of Equalization
Memorandum
495.0130
To:
District and Subdistrict Administrators
From:
Headquarters – Principal Tax Auditor
Subject:
Conditional Sale Subject to Sales Tax
Per Section 6006(e)
Date:
April 3, 1981
The responses to my letter of January 8, 1981, requesting feedback from the districts on new or unusual situations uncovered by audit included a sale on approval” problem you may encounter. The tax application, approved by our counsel, is explained herein in the interest of uniform administration. Here is how Inglewood District described the situation: An audit disclosed the following transaction. A $XX,XXX machine was sold to a New York customer/consumer. An agent (not a carrier) of the New York customer delivered the machine to the University of Illinois for testing after which it was delivered to the New York purchaser for use. Seller claimed the sale as an exempt sale since the sale did not occur until the purchaser “accepted” the property which we acknowledged occurred out-of-state (A/Illinois). Taxpayer cited Regulation 1628, Section (b)(3)(C), Determination of when sale occurs – sale on approval. “When a sale is on approval, the sale does not occur until the purchaser accepts the property.” (Emphasis added) We responded by stating that our contention is that Section 6006(e) applies: “‘Sale’ means and includes a transaction whereby the possession of property is transferred but the seller retains title as security for the payment of the price.” Possession was transferred to an agent of the buyer in this state, a point that is not disputed by the parties. With regard to the contention that the contract represents a sale on approval, we referred to the Uniform Commercial Code Sections 2-326 and 2-327. (A) Section 2-326 states, “Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the contract is a ‘sale on approval’ if the goods are delivered primarily for use…” The contract in question did not conform to that provision. Section 5 on page 3 of the contract provides that the seller warrants the equipment against defects for the first year. This warranty against defects is quite similar to the warranty on most new products sold, and can in no way be construed to provide that the buyer could return the machine for any reason. (Appears there was a second page, which is missing. SPJ 9/18/01)
State of California
Board of Equalization
Memorandum
495.0130
To:
Mr. Glenn Bystrom
From:
Gary Jugum
Subject:
Non-Attorney Opinions
Date:
July 10, 1996
I have reviewed Headquarters – Principal Tax Auditor’s memorandum of April 3, 1981 to District and Subdistrict Administrators. We are in agreement with his conclusion, as follows:
Conditional Sale v. Sale on Approval. The sale of property which was delivered to the out-ofstate buyer’s agent in California who delivered it to an out-of-state university for testing, and then delivered it to the buyer in New York does not qualify for exemption as a “sale on approval” in interstate commerce, merely because the “approval” occurred in New York. Pursuant to Regulation 1628(b)(3)(C), “When a sale is on approval, the sale does not occur until the purchaser accepts the property.” The Uniform Commercial Code, however, sets specific requirements for sale on approval. The recipient must have the unconditional right to return the goods, even if they meet the contract specifications. Any impediment to the exercise of this right prevents the contract from being “on approval”. Examples of such impediments would be requiring the buyer to make payment upon signing of the contract; retention of title by the seller until final payment is made, rather than upon approval; making the right to return the goods conditional upon failure to conform to the contract; and requiring the recipient to accept risk of loss. If these or other impediments prevent the contract from being “on approval”, the sale is a conditional sale as described in section 6006(e). 4/3/81
Gary Jugum
By MB
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