Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Sternoff v. State Board of Equalization . . . (1980)

Custom Packers Are Consumers of Raw Materials Bought for Containers

Plaintiffs perform custom packing including the construction from raw material of containers around goods which require special preparation prior to shipment. Plaintiffs maintain inventories of lumber, nails, strapping material, and other types of container material which become components of the container. This container material was purchased without payment of sales tax after plaintiffs issued resale certificates to their various suppliers. Plaintiffs were not the sellers of any of the goods that were packaged and plaintiffs did not perform any of the subsequent shipment of goods. The packing and preparation was generally performed by plaintiffs at their various business locations. Thereafter, the contained goods would be delivered to a carrier for shipment pursuant to directions from plaintiffs' customers.

Items packaged for shipping included delicate instruments and machinery and computers, which were principally shipped in interstate or foreign commerce. The containers and packages were made for customers on an individual or job basis to hold specific goods. There was no understanding that the containers or packages would be returned to plaintiffs by plaintiffs' customers for reuse. Plaintiffs billed their customers a lump sum amount for packing and containing and did not make a "separate charge" for the container material. Although each transaction was based on an "express" contract agreement with the customer, there was no express provision for the passage of title to the container material in plaintiffs' billings, invoices, or other contract writings. Most of the purchase orders received by plaintiffs were verbal.

The Board assessed tax on plaintiffs' purchases of the materials on the ground that plaintiffs were not "selling" the containers to the customers but were instead providing a service of which the containers were an integral part.

Thus, the plaintiffs were consumers of the materials used in constructing the containers and could not purchase the materials for resale. The court of appeal held that plaintiffs did not meet the conditions required for effecting a retail sale of the containers but were instead the consumers of the materials. As such, tax applied to their purchases of the materials. Sternoff v. State Board of Equalization (1980) 103 Cal.App.3d 828.