Was leased data-processing equipment exempt when substantially installed on foreign-commerce passenger cruise ships?

Plain-English summary

A passenger cruise operator leased a data-processing machine for each foreign-commerce ship. Each machine supported records for feeding, housing, and serving passengers, was anchored to the ship, and connected to the ship's electrical system.

Regulation 1594 required component property to be an integral part of the watercraft and substantially affixed or attached while in use. California found that these machines met that standard.

Because the ships transported persons for hire in foreign commerce, the sale or use of the installed machines was exempt under section 6368. The letter also treated the ships as mobile transportation equipment for the lease rules and suggested a watercraft exemption certificate, although that printed form names section 6363 rather than the section 6368 used in the analysis.

What this means for you

Vessel operators, marine-equipment lessors, and shipboard IT teams

Document both function and physical integration. Equipment used aboard a vessel is not enough by itself; the letter relied on substantial anchoring, connection to ship power, passenger-service use, and the ship's qualifying foreign-commerce operation.

Common questions

Q: Were the machines merely portable office equipment?

A: No. They were substantially attached and connected to the ships' electrical systems.

Q: What did the machines do?

A: They supported recordkeeping for feeding, housing, and serving passengers.

Q: Does the sample certificate contain a section-number issue?

A: Yes. It prints section 6363, while the opinion's analysis relies on section 6368.

Citations and references

• California Revenue and Taxation Code §§ 6006(g)(4), 6023, and 6368
• California Sales and Use Tax Regulation 1594

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 600.0375
• Original supporting opinion: 600.0375 PDF

Original ruling text

600.0375

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-3723

September 13, 1976

Mr. [O]
Vice President
Finance and Administration
[S]
XXXXX --- ----- ---, -- XXXXX

S- -- XX-XXXXXX

Dear Mr. [O]:
This is in response to your letter of September 1 to Board Member Richard Nevins. You state that you are engaged in the for-hire operation of passenger pleasure cruise ships in foreign commerce. You have leased from [I] and installed on each of your ships a data processing machine to assist you in the record-keeping in connection with feeding, housing and serving your passengers. You state that the machine is substantially attached to the ship by various anchoring and attachment devices and is connected to the ship’s electrical power system. Under the circumstances that you have described, the data processing machine is a component part of the ship and, since the ship is used in transporting persons for hire in foreign commerce, the sale or use of the machine is exempt from sales or use tax pursuant to Section 6368 of the Revenue and Taxation Code and Regulation 1594. Regulation 1594 provides that to be exempt as a “component part” of a watercraft, the property must be an integral part of the watercraft, affixed or attached thereto in a substantial manner when in use. As examples, the regu1ation refers to: “All property affixed or attached to the structure of the watercraft used while thus affixed or attached for navigation or operation, such as: radio transmitters, receivers and other radio equipment, radar equipment, intercommunications systems….” The data processing machine, as you have described it, fairly falls within this meaning of “component part.” The type of exemption certificate that you should furnish to [I] is affected by the fact that the ship is “mobile transportation equipment” as defined in Section 6023 of the Revenue and Taxation Code. The lease of the machine, accordingly, is excluded from the definition of “sale” by Section 6006(g) (4). Thus the tax, if it were applicable, would be a use tax on measured by its purchase price of the raw materials.

Mr. [O]

-2-

September 13, 1976
600.0375

I suggest that you give to [I] a certificate in the following form, which is adapted from the certificate in Regulation 1594, a copy of which is enclosed: Watercraft Exemption Certificate I hereby certify: That the watercraft identified below is used in the transportation by water of persons for hire in foreign commerce; That the data processing machines which I shall lease from [I] are tax exempt under Section 6363 of the Sales and Use Tax Law and Regulation 1594 as tangible personal property becoming a component part of watercraft in the course of improving the same, which watercraft will be used principally in the operation described above. Signature of Lessee Address Date of this Certificate Seller’s Permit No. (if any) Names of Watercraft for which certifying lessee will be making leases:

Very truly yours,

T. P. Putnam
Assistant Chief Counsel
TPP:lb
Enclosure