Were sales to Western Farm Credit Bank exempt from California sales and use tax, and what documentation could a seller retain?

Plain-English summary

California treated Western Farm Credit Bank as a federally chartered instrumentality of the United States. The Agricultural Credit Act provisions cited in the memorandum exempted Farm Credit Banks from federal, state, municipal, and local taxation, apart from the stated real-estate exception.

California's own federal-instrumentality rules also covered the bank. Regulation 1614 referred to Federal Land Banks, which were predecessors merged into Farm Credit Banks, and the memorandum concluded that the exemption extended to the successor banks. The same status protected the bank's storage, use, or consumption of tangible personal property because federal law did not permit that taxation.

A seller claiming an exempt sale ordinarily had to retain a government purchase order or remittance advice. If Western Farm Credit Bank did not use those documents, the Board offered to issue a verification letter that the bank could present and the seller could retain instead.

What this means for you

Farm Credit institutions, vendors, purchasing teams, and tax advisers

Entity status and documentation are separate questions. Even when the buyer qualifies as an exempt federal instrumentality, the seller should retain the evidence required to support the exempt sale.

Common questions

Q: Was Western Farm Credit Bank exempt?

A: Yes, under the federal and California provisions discussed in the memorandum.

Q: Did the exemption extend to use tax?

A: Yes, because federal law did not permit taxing the bank's use of tangible personal property.

Q: What could a seller keep as proof?

A: A government purchase order, government remittance advice, or the proposed Board verification letter if the bank did not use those documents.

Citations and references

• 12 U.S.C. §§ 2011(a) and 2023
• California Revenue and Taxation Code §§ 6381 and 6402
• California Sales and Use Tax Regulation 1614

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0370
• Original supporting opinion: 505.0370 PDF

Original ruling text

State of California

Board of Equalization

Legal Division (MIC:82)

505.0370

Memorandum
To:

From:

Subject:

Mr. Arden Taube
Audit Evaluation and Planning

Date:

March 26, 1991

Victoria Lani Arena
Tax Counsel
Tax Exempt Status of Western Farm Credit Bank
This is in response to your memorandum of January 17, 1991, requesting written verification that sales to Western Farm Credit Bank are exempt from California Sales and Use Tax. Western Farm Credit Bank is a Farm Credit Bank, and as such, it is a federally chartered instrumentality of the United States pursuant to Section 1.3 of the Agricultural Credit Act of 1987 (the “Act”) which is codified at Title 12 United States Code Section 2011(a). Farm Credit Banks are exempt fro state sales and use taxes pursuant to Section 1.15 of the Act (12 U.S.C. § 2023), which provides: The Farm Credit Banks and the capital, reserves, and surplus thereof, and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes on real estate held by a Farm Credit Bank to the same extent according to its value, as other similar property held by other persons is taxed. The mortgages held by the Farm Credit Banks and the notes, bonds, debentures, and other obligations issued by the banks shall be considered and held to be instrumentalities of the United States and, as such, they and the income therefrom shall be exempt from all Federal, State, municipal, and local taxation, other than Federal income tax liability of the holder thereof under the Public Debt Act of 1941 (31 U.S.C. 3124). California law also provides that retail sales to federal instrumentalities are exempt from sales tax. Section 6381 of the California Revenue and Taxation Code provides: United States. There are exempted from the computation of the amount of the sales tax the gross receipts from the sale of any tangible personal property to: (a) The United States, its unincorporated agencies and instrumentalities;

Arden Taube

-2-

March 26, 1991
505.0370

(b)
Any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States; (c) The American National Red Cross, its chapters and branches. California Sales and Use Tax Regulation 1614 interprets this exemption as including Federal Land Banks which were the predecessors-in-interest to the Farm Credit Banks. The Act merged the Federal Land Banks and the District Federal Intermediate Credit Banks into the Farm Credit Banks. (12 U.S.C. §2011.) Accordingly, the Board takes the position that the exemption is intended to include the Farm Credit Banks. Regulation 1614(a) also provides a use tax exemption. It provides in relevant part: “Application of the use tax to the storage, use, or other consumption of tangible personal property by agencies or instrumentalities of the United States is prohibited unless federal law permits taxing the agency or instrumentality.” As noted above, federal law does nnot permit taxing Farm Credit Banks. Additionally, the storage, use, or other consumption in California of tangible personal property purchased from federal instrumentalities, with the exception of certain surplus property, is exempt from use tax pursuant to Section 6402. Regulation 1614(g) describes the documentation required to support the federal instrumentalities, with the exemption. It provides that: “Any seller claiming a transaction as exempt from tax under section 6381 must obtain from the purchaser, and retain, a government purchase order or a government remittance advice to support his claim”. If Western Farm Credit Bank does not use such government purchase documents, we would be happy to write a letter directly to the Bank verifying its tax-exempt status. When making purchases, the Bank could then present a copy of such letter, in lieu of a government purchase order, to any seller. The seller would then retain the copy of the letter as verification of the tax exempt statuts of the sale. This would effectively satisfy the requirements of Regulation 1614(g). Please contact me if you have any further questions. VLA:es