Were sales to Fannie Mae exempt from California sales tax even after its stock became entirely privately owned?

Plain-English summary

Fannie Mae's stock was entirely privately held and traded on the New York Stock Exchange, but California still treated it as an incorporated federal instrumentality.

Congress created Fannie Mae under the National Housing Act. Although the government retired its stock when Congress separated Fannie Mae from the government-owned Ginnie Mae, federal law specifically exempted Fannie Mae from taxation imposed by a state.

Regulation 1614(a)(4) allowed the exemption for an incorporated federal instrumentality not wholly owned by the United States unless federal law permitted the tax. Because federal law instead barred state taxation, California concluded that sales to Fannie Mae were not subject to sales tax.

What this means for you

Vendors to housing-finance entities and tax advisers

Private ownership did not decide the issue. The memorandum relied on federal creation and an express federal tax exemption, so the exact entity and current statute matter.

Common questions

Q: Was Fannie Mae government-owned at the time?

A: No. Its stock was entirely privately held.

Q: Why was it still exempt?

A: Federal law created it and specifically exempted it from state taxation.

Q: Did California treat it as a federal instrumentality?

A: Yes, as an incorporated federal instrumentality under Regulation 1614(a)(4).

Citations and references

• 12 U.S.C. § 1716 et seq.
• 12 U.S.C. § 1723a(c)(2)
• California Sales and Use Tax Regulation 1614(a)(4)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0118
• Original supporting opinion: 505.0118 PDF

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum
To

: KH – Compliance
Robert Colivas

From

: Headquarters – Legal
Robert J. Stipe

505.0118
Date :

October 21, 1988

Subject : Federal National Mortgage Association (Fannie Mae)

Your memorandum to Senior Tax Counsel Les Sorensen has been referred to me for a reply. You inquire whether the Federal National Mortgage Association (Fannie Mae) qualifies as an instrumentality of the United States government pursuant to Sales and Use Tax Regulation 1614 since its stock is entirely privately held and traded on the New York Stock Exchange. As I understand the facts, Title III of the National Housing Act (12 U.S.C. 1716 et seq.) created a corporate body known as the Federal National Mortgage Association (Fannie Mae). In 1968, Congress amended the National Housing Act to partition the Federal National Mortgage Association into two separate entities. One entity was the Government National Mortgage Association (GNMA) and the other retained the name Federal National Mortgage Association (Fannie Mae). GNMA remained in the government and Fannie Mae became entirely privately owned by retiring the government-held stock. We note, however, that the National Housing Act, in pertinent part, provides that Fannie Mae shall be exempt from all taxation imposed by any state (12 U.S.C. 1723a(c)(2)). Sales and Use Tax Regulation 1614(a)(4) provides that sales tax does not apply to sales to incorporated federal instrumentalities not wholly owned by the United States unless federal law permits taxing the instrumentality. In our view, Fannie Mae qualifies as an incorporated federal instrumentality under the provisions of Regulation 1614(a)(4). Our opinion is based on the fact that Fannie Mae is incorporated under the powers of the federal government and, although not entirely owned by the United States, federal law does specifically exempt Fannie Mae from state taxation. Accordingly, sales tax does not apply to sales to Fannie Mae.

RJS:sr