Could a watercraft contract carrier qualify for the section 6385 exemption, and must it be separate from the shipper?

Plain-English summary

A watercraft contract carrier could qualify for the section 6385 common-carrier exemption even if it was not a common carrier in the ordinary sense. The carrier had to transport property for compensation in interstate or foreign commerce.

The carrier also had to be legally separate from the shipper. A separate corporation could qualify even if wholly owned by the shipper, but the shipper's own vessel or an internal division could not be treated as providing compensated carrier service to the shipper.

Required bills of lading and exemption certificates still had to support the exemption. The 1996 Legal Division memorandum reviewed and approved the conclusion of the underlying January 8, 1985 audit memorandum.

Common questions

Did the carrier have to be a traditional common carrier?

No. For watercraft, the opinion said a contract carrier could qualify under section 6385.

Could a wholly owned carrier corporation qualify?

Yes, if it was a separate entity engaged in compensated interstate transportation and the other requirements were met.

Could the shipper operate its own vessel and claim the exemption?

No. The opinion said the separate compensated-carrier requirement was not met when the shipper itself or its division operated the vessel.

Citations and references

• California Revenue and Taxation Code section 6385 — water common-carrier exemption interpreted in the memoranda

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/500-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/500-0450.pdf

Original ruling text

State of California

Board of Equalization

Memorandum
To:

San Francisco – Auditing (RC:EL)

From:

Principal Tax Auditor

Subject:

--- --- --- S---

500.0450
Date:

January 8, 1985

SY -- XX-XXXXXX

In your memorandum of December 11, 1984, you requested my opinion as to whether S--- and its realted corporation, H--- S--- T---, qualify as a common carrier under Section 6385. You believe that the vessels operated by these entities are contract rather than common carriers and, therefore, the exemption does not apply. Section 6385 defines the term “common carrier”, with respect to water transportation, “…to include any vessel engaged, for compensation, in transporting persons or propety in interstate or foreign commerce.” Therefore, for watercraft only, the carrier does not have to be a “common” carrier as generally defined. A contract carrier can also qualify under this section of the law provided that certain conditions are met. The carrier must be a separate entity from the entity that is shipping the product, such as a separate corporation. This may be a wholly owned corporation but may not be a division of the corporation that is providing the goods to be transported. The contracts you provided show H--- S--- T--- either owns or charters all the ships it uses to transport the sugar or other commodities. However, your memorandum indicates that for a period of time m/s S--- I--- was being operated by S--- itself. *When the vessel was operated by S---, the exemption provided under Section 6385 is not available, since it is not a separate entity providing the carrier service for compensation. I agree that H--- S--- T--- Corp. (HSTC) may not be a true common carrier. However, HSTC is a separate corporation engaged in the business of transporting property for compensation in interstate commerce. If the proper bills of lading and exemption certificates are timely filed, HSTC would qualify for the exemption under Section 6385(a). While conducting this investigation do not go back into the prior audit period. If you have information that makes the transactions taxable in prior periods, please notify S--- of this so they will be on notice that if the same situation occurs in the future the exemption will not be allowed.

GAB:nc
cc:

Mr. Donald Hennessy

*Watercraft common carrier exemption must be
separate entity providing transportation.

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
500.0450

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

Date:

July 10, 1996

I have reviewed your memorandum of January 8, 1985 to San Francisco – Auditing (RC:EL). We are in agreement with his conclusion, as follows:

Vessel. The exemption afforded to common carriers by section 6385 applies equally to watercraft contract carriers by virtue of the wording in sub-paragraph (e). This paragraph also requires that the carriage be provided for compensation, which precludes voyages of vessels owned by the shipper whether directly or by a division. Such an agreement could not be construed as providing the carrier service for compensation. The carrier must be an entity separate from the shipper, such as a separate corporation, even if it is wholly owned by the shipper. The exemption must be supported by the required bills of lading and exemption certificates, whether the carrier is classified as common or contract. 1/8/85

Gary Jugum
By MB