Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
325.0000 INTERSTATE AND FOREIGN COMMERCE—Regulation 1620
(a) IN GENERAL—SHIPMENTS INTO CALIFORNIA FROM POINTS OUTSIDE STATE
325.0168 Title Passing to the Purchaser at an Out-of-State Point. A manufacturer has a manufacturing facility located out of state and a sales/distribution warehouse in California. It manufactured equipment to the customer's order at its out-of-state facility and shipped the equipment to the manufacturer's California warehouse for storage. When equipment is needed at the wellsite, which is located in federal waters outside California, either the customer will pick up the equipment at the warehouse, or the manufacturer will deliver it to the wellsite by its facilities or by common carrier.
The manufacturer proposes to include a title clause in its acknowledgment to the customer's purchase order. The clause will notify the customer that title will pass to the customer at the out-of-state manufacturing point so that the transaction will not be subject to the sales tax as set forth under Regulation 1620(a)(1).
To be effective, the title clause must be part of the sale contract between the manufacturer and the customer. A unilateral title clause is not acceptable. A recommended procedure is that the title clause be included in the customer's purchase order and acknowledged by the manufacturer before the equipment is delivered in California. If the customer submits a verbal order, or a written order which does not include a title clause, the manufacturer may include the title clause in the acknowledgment of the order. In that case, however, the manufacturer should ensure that the customer accepts the title clause by signing a copy of the acknowledgment, and returning the signed copy to the manufacturer, before the equipment is delivered in California.
The manufacturer should also be careful to avoid any actions inconsistent with the prior passage of title to the customer. For example, any time the property is shipped, the bill of lading should show the customer as the shipper, or should at least indicate that the manufacturer is acting as the shipper on behalf of the customer. Similarly, any insurance forms or other document relating to the storage in California should not state or imply that the manufacturer has title in the equipment.
If the sale contract includes a clause under which title in the equipment passes to the customer outside California, then sales tax will not apply, with one limited exception. The exception is where the contract is not performed as written. For example, if the equipment is delivered to the California warehouse, but the customer rejects or otherwise refuses to receive or retain the equipment, title in the property will revert to the manufacturer by operation of law under California Commercial Code section 2401. If the manufacturer then cures the defect and delivers the equipment to the customer in California, title will pass in this state and sales tax will apply.
Since the equipment is to be used in federal waters outside California, and not for storage use or other consumption in this state, the equipment will not be subject to the use tax pursuant to the exclusion provided by section 6009.1. The manufacturer will be relieved from the duty to collect the use tax if an appropriate certificate is received in good faith from the customer. This certificate must be in writing and must be signed by the customer or his authorized representative before or at the time of physical delivery to the customer. It must state that the equipment is purchased for use solely outside California at a named point or points outside this state. 9/3/85.