Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales and Use Tax Annotations
335.0000 LEASES OF MOBILE TRANSPORTATION EQUIPMENT— Regulation 1661
335.0575 Cargo Containers and Chassis Used in Ocean Shipping. A domestic shipping company is engaged in worldwide ocean shipping, and does not engage in transporting cargo from point to point within California. It purchases cargo containers and chassis which are used in its shipping operations. After a brief period following the purchase, the shipping company will sell the cargo containers and chassis to a trust and then lease them back from the trust. The sale and leaseback is governed by one master agreement but there are multiple deliveries of both containers and chassis to the trust over a period of several months. Tax application to the cargo containers and chassis is discussed below.
(1) Cargo Containers. The cargo containers are manufactured in foreign countries and the shipping company will take delivery of them at the manufacturer's premises and place them in service at the earliest possible moment. Title to the containers will pass to the shipping company outside of California. At the time of transfer to the trust and the leaseback to the shipping company, the containers will be physically located either outside of California, on the high seas, in a foreign country, or within operations. Cargo containers entering California will be loaded with cargo and after delivery of the cargo, the containers will continue to be used in the shipping company's worldwide shipping operations.
(A) The sales of the cargo containers to the shipping company are retail sales and not sales for resale since the shipping company will put the containers to use prior to its sale to the trust.
(B) Since the sales of the containers to the shipping company takes place outside of California, the sales are not subject to the sales tax. Although the containers are not subject to sales tax and the first functional use of the containers takes place while the containers are located outside of California, use tax would nevertheless apply to the shipping company's use of the containers in California if the containers enter this state within 90 days from the date of purchase and are not continuously used in interstate or foreign commerce, or are not used by the shipping company outside of the state at least 50 percent of the time over a six month period. Use tax would not be applicable to any in-state use of the containers by the shipping company if the shipping company uses the containers outside of California in excess of 90 days from the date of purchase to the date of their entry into California exclusive of the time of their shipment unloaded with cargo to California.
(C) Sales tax applies to the sale from the shipping company to the trust for those cargo containers which are physically located within California at the time of sale, notwithstanding the fact that the containers are purchased by the trust for use in interstate or foreign commerce. Since cargo containers are mobile transportation equipment ("MTE") under Regulation 1661, the trust as lessor of the MTE may make a timely election to report the tax measured by the fair rental value as provided by Regulation 1661. Although sales tax does not apply to containers physically located out of state at the time of sale, the trust as lessor may nevertheless be liable for use tax when the property is purchased for lease in California. Regulation 1661 provides that if the sale and delivery of the MTE occurs outside of California and the property is purchased for use by the lessor, use tax will apply measured by the purchase price unless the equipment enters the state in interstate commerce and is used continuously thereafter in interstate commerce, or the lessor makes a timely election to report his use tax liability measured by fair rental value.
When the containers are first functionally used by the trust outside of California in interstate or foreign commerce, the containers are nevertheless presumed to have been purchased for use in this state if they are brought into this state within 90 days from the date of the sale to the trust. This presumption does not apply, however, under the following conditions: (a) the property is used or stored outside of California one half or more of the time during the six-month period following its entry into California, or (b) the property is purchased for use and is used in interstate or foreign commerce prior to its entry into this state and thereafter used continuously in interstate or foreign commerce both within and without California and not exclusively in California.
(2) Chassis. Chassis are pulled by the tractor unit of a truck and can be used to carry cargo containers on highways. These chassis are manufactured within the United States, including California. Title to the chassis will pass to the shipping company while they are located at the manufacturer's premises and the manufacturer will deliver them to their ultimate destination, which will be in California in most cases. For the brief period between the shipping company's acquisition of the chassis and their resale to the trust, the shipping company will not make any use of the chassis. The sales of the chassis to the shipping company are sales for resale and the tax application to the subsequent sales from the shipping company to the trust is the same as that under paragraph (1)(C) above. 9/20/84.
(Note: Subsequent statutory change concerning sales and leaseback.)