Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2017

Sales and Use Tax Annotations

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Annotation 335.0004.700

335.0004.700 Cargo Containers. X acquires tangible personal property in California to be incorporated into ocean going cargo containers by a manufacturer in Mexico. The Mexican manufacturer is a maquilladora facility owned by X. X retains title to the property throughout the manufacturing process in Mexico. X then sells the containers to a leasing company and directs the manufacturer in Mexico to send the containers directly to the leasing company in California.

At the time the leasing company purchases the containers from X, it has already leased them to a specific lessee. Upon delivery to that lessee, the containers are filled with freight and then loaded onto ships having foreign destinations. The containers leave California within thirty days after the date of delivery to the leasing company.

Even though X purchases the raw materials in California, the containers are not manufactured in California so they do not qualify for the exemption provided by section 6388.6. Reusable cargo shipping containers are mobile transportation equipment and the lessor is regarded as the consumer. Since the sale to the lessor occurs outside California, sales tax does not apply. Since the containers are first filled in California, however, the first functional use is made in California. Therefore, the lessor is regarded as purchasing the container for use in California and tax applies to the purchase price unless the lessor makes a timely election to pay its tax liability measured by fair rental value. If it makes such an election, tax applies to the fair rental value whether the containers are inside or outside California. 12/6/91.