Did deliberately destroying defective computer components bought for resale create taxable use?

Plain-English summary

A company bought computer tubes and pluggable units ex-tax for resale. After installation, slight humming and vibration disrupted the computers. Although the parts could have been sold as ordinary television components through surplus stores, the company destroyed them to avoid warranty problems.

California found no taxable use. The destruction was deliberate, but sound business reasons made it involuntary in substance, so the memorandum treated it like accidental destruction rather than consumption of the resale inventory.

Common questions

Did the fact that the components might have been sold as surplus make destruction taxable?

No. Warranty concerns supplied a sound business reason for destruction on the stated facts.

Is every deliberate destruction of resale inventory nontaxable?

The memorandum did not establish that broad rule. Its conclusion depended on the defective components and business reasons described.

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/570-1380.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Jose – Auditing (SE/JGL)

From:

Tax Counsel (PM) - Headquarters

Subject:

I--- Corp.
S--- J--- General Products Plant
--- and --- Roads
--- ---, California

570.1380

October 23, 1964

OS-G-XXXXX

This is in reply to your memorandum of August 19 concerning a possible use tax liability on the part of the above company. Briefly, I--- made an ex-tax purchase of tubes and pluggable units to be used in computors. On installation it was found that the tubes and pluggable units hummed slightly, causing minute vibrations which disrupted the delicate balance of the computors and caused them to malfunction. The tubes and pluggable units were identical to those used in ordinary television sets and could conceivably have been sold to surplus stores for sale to the general public. I--- decided against this, however, because of the warranty problems. Instead, it had the tubes and pluggable units destroyed by L---’s M--- & S--- Co. of S--- J---. It is our opinion that, under these circumstances, I--- should not be regarded as making a taxable use of the property. Although the destruction was a deliberate act, it was involuntary in the sense that I--- had sound business reasons for destroying the defective tubes rather than marketing them. We believe that its act of destruction should be treated in the same manner as an accidental destruction.

PM:md