Taxpayer Wins!! Last year (3/94 issue), I wrote about a sale of a $15,000,000 aircraft on which the state was assessing tax.

By way of background, this aircraft was originally sold by a dealer to a consumer who then leased it back to the dealer. This dealer was also a charter company and qualified as a common carrier.

To qualify for an exemption, the use of the aircraft during the first 12 consecutive months is critical. During this twelve month period, the aircraft must be used as a common carrier more than half the time.

In our case, the state took the position that when the plane was chartered by the original purchaser, it was not used as a common carrier. Our position was that since the original purchaser paid for the usage as would anybody else, the flight hours qualified as common carrier hours and, as such, the greater than 50% usage test was met.

Our secondary argument was that even if the transactions were taxable, the state was holding the wrong party liable. Since the original seller (who was also the lessor/common carrier) took the exemption certificate at the time of the sale, he was relieved of the liability.

It is the second position that won the case. No opinion was given on the first.

With this in mind, I would like to go over the issue of exemption certificates, what form is required and when they should be issued (and more importantly, obtained).

Regulation 1667 states that a seller is relieved of the liability for sales tax if he timely accepts an exemption certificate stating that the property will be used for an exempt purpose. This “exempt purpose” must be in accordance with the provision of Chapter 4 (dealing with exemptions) of the sales and use tax law. The requirements for a valid certificate are:

* It must be in writing and include the date.
* It must be signed by the purchaser, the purchaser’s agent or employee.
* It must have the name and address of the purchaser.
* It must have the seller’s permit number of the purchaser or if none is required, a notation to that effect.
* It must contain a description of the property to be purchased.
* It must state the exempt manner in which the property will be used.

The seller still has the responsibility to understand the nature of the exemption and to ascertain that it is in accordance with the sales and use tax law and/or regulations. It would, therefore, be advisable that the certificate include a reference to the Revenue and Taxation Code section providing the exemption. For example, a seller could not avoid liability sales tax by taking an exemption certificate that states the buyer does not intend to use the property in California. No code section allows for such an exemption when property is delivered in California.

Many regulations prescribe their own exemption certificates. Others, however, only mention that certificates should be given. Some examples of when to obtain an exemption certificate include:

* Sales of tangible personal property that is to be used on out-of-state construction contracts. (Reg 1521)
* Factory built housing. (Reg 1521.5)
* Sales of printed sales messages. (Reg 1541.5)
* Sales to charitable organizations. (Reg 1570)
* Sales of feed and drugs to be mixed with feed used to feed food animals (cows not horses). (Reg 1587)
* Sales of fertilizers to be used in agriculture or to grow food for food animals. (Reg 1588)
* Sales of prescription medicines. (Reg 1591)
* Sales of aircraft to common carriers. (Reg 1593)
* Sales of watercraft to common carriers or for deep sea fishing. (Reg 1594)
* Sales of certain aircraft fuel. (Reg 1598)
* Sales of residential mobilehomes. (Reg 1610.2)
* Certain sales to Indians. (Reg 1616)
* Certain sales to common carriers. (Reg 1621)
* Sales to persons holding a direct payment permit. (Reg 1669.5)
* Interstate sales to known California residents. (Revenue and Taxation Code Section 6247)

In summary, compliance is everything with the sales tax law. Make sure that you advise your sellers to retain exemption certificates, just as they retain resale certificates. In this case, obtaining such a certificate, saved the taxpayer a $1,500,000 in taxes and interest.