A recent case before the State Board of Equalization will hopefully change the way sales tax auditors narrowly view the exemption allowed for out of state sales.
In June of this year, the Board members granted a claim for refund to Varian Associates for sales taxes assessed and paid on certain interstate transactions. The taxes were paid pursuant to an audit covering the period 1/1/81 to 3/31/84. The original auditor assessed these taxes against Varian because the items sold were first shipped to a storage facility in California, until the customer was ready to receive shipment. Ultimately, the claimant shipped the items out of California. Regulation 1620 provides in pertinent part: Sales Tax does not apply when the property pursuant to the contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer…. Auditors normally interpret this section to mean that shipment must be made directly to an out of state destination.
The Board concluded, however, that although title and risk of loss to the property sold passed to the customers in this state, claimant was still contractually obligated to ship the property out of state. A word of caution here may be in order. This is a unique case in that the property was shipped to a storage facility and not functionally used in California by the buyer. Don’t interpret this case to mean that sellers can exempt any sales delivered in California as long as some point in the future they are contractually obligated to ship and do ship the products out of state. Such a broad interpretation would be incorrect.
In a related case decided in November 1992, the California Court of Appeals reached a similar conclusion for McDonnell Douglas Corporation. In this case, airplane parts were sold to Aero-Mexico but were somewhat diverted in transit at the Mexican border (in San Ysidro, California)for processing through customs. The Court ruled, however, that despite the unavoidable delay at the Mexico border, the parts were in the “export stream” for purposes of exemption for state sales tax.
Regulation 1620 in discussing exports says in pertinent part that the property must be delivered in a continuous journey to the foreign country. The Board claimed that the parts were not in the “export stream” until they left the border and thus were subject to tax. Sales tax consultants and/or business tax consultants should be consulted on large transactions to avoid potential CA use tax liability.
