Did bar merchandise lost through breakage, spillage, theft, fire, or unexplained disappearance create tax on self-consumed resale inventory?

Plain-English summary

A bar operator asked about merchandise lost through breakage, spillage, fire, theft, or mysterious disappearance.

California said section 6094's tax on nonresale use did not apply when property was involuntarily lost and there had been no intervening taxable use. The retailer still had to maintain adequate records and establish that the claimed loss was genuine.

Common questions

Did every unexplained shortage qualify?

No. The asserted involuntary loss had to be bona fide and supported by adequate records.

What would change the result?

An intervening taxable use before the loss would take the property outside the stated no-tax rule.

Citations and references

• Cal. Rev. & Tax. Code § 6094 — resale-certificate property used before resale and cost-based tax measure discussed by the source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/570-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/570-1340.pdf

Original ruling text

570.1340

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 15, 1952

C--- & G--Certified Public Accountants
XXX South --- Street
--- --- XX, California
Attention:

Mr. S. G---

Gentlemen:
You inquire as to your client’s possible sales tax liability on merchandise which is lost due to either breakage, spillage, or mysterious disappearance in the operation of a bar. Section 6094 of the California Sales and Use Tax Law provides, in substance, that if a purchaser gives a resale certificate and makes any use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the use constitutes a retail sale by him as of the time the property is first used, and the cost of the property to him shall be deemed the gross receipts from such retail sale. Where property is lost due to fire, theft, breakage, spillage, or is otherwise not resold but there has not been any intervening taxable use, the tax liability provided for in Section 6094 is not applicable. Of course, the retailer is expected to maintain adequate records and the asserted involuntary loss must be bona fide. Very truly yours,

W. W. Mangels
Assistant Counsel

WWM:ja
cc:
Los Angeles – Tax Administrator