Were contracts supplying disposable or returnable in-transit temperature recorders to carriers sales or leases of devices, or monitoring services?

Plain-English summary

Two companies supplied carriers with devices that recorded cargo-compartment temperatures in transit. One company's devices were disposable unless the customer wanted the record read; the other's devices always had to be returned.

California treated both arrangements as service contracts rather than a sale of the disposable unit or a lease of the returnable one, although the memorandum said the issue was not free from doubt.

Factors pointing toward property treatment included the carrier's possession, the device's ability to record without provider personnel, and its possible deterrent effect on weak cargo claims.

The service factors prevailed: an expert had to read the instrument, the provider offered further cooperation without extra charge, the instrument was not directly productive for the carrier, and provider testimony in arbitration or court was the contract's most important practical consequence.

What this means for you

Monitoring providers and carriers

Temporary possession of a sensor did not control when expert interpretation and claims support were the central deliverables.

Accountants and tax professionals

Document device return, customer usability, expert analysis, report delivery, ongoing support, litigation testimony, separate charges, and ownership.

Common questions

Q: Was the disposable device treated as a taxable sale?

A: No.

Q: Was the returnable device treated as a lease?

A: No.

Q: Why were both arrangements services?

A: Expert reading, cooperation, and testimony outweighed temporary device possession.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0019.200
• Original supporting opinion: 515.0019.200 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Modesto Compliance

From:

Philip R. Dougherty

Subject:

T--- S---, Inc.
R--- I---

515.0019.200

Date:

February 28, 1980

Sales Tax – Unlicensed
SV -- XX XXXXXX

Although the matter is by no means free from doubt, I believe that on balance, we should conclude that T--- S--- as well as R--- I--- in-transit temperature monitoring contracts are service contracts rather than, respectively, sales and leases of tangible personal property. On one hand, the carrier must have possession of the temperature recording instrument during the carriage, the instrument is the item which makes the recording of the temperatures without the attending services of the monitoring company’s personnel during the recording, and the mere presence of the item in the vehicle may tend to inhibit frivolous claims. On the other hand, the instruments must be turned over to an expert to read, the company providing the instrument also provides its further cooperation without additional charge, the instruments are not directly productive in the hands of the carrier, and the testimony of the company representatives in arbitration or court proceedings is the most powerful practical consequence of the contracts. Were we to regard T---’s provision of the disposable devices as sales of tangible personal property, we would, perforce, regard R---’s provision of the returnable devices as leases since the only distinction between them from the customer’s viewpoint is that R---’s instruments must always be returned while T---’s need only be returned should the customer desire a reading of the temperature record.

PRD:ba
cc:

Out-of-State Compliance