Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.0004


395.0004 Acquisition of Assets—Joint Venture. An opinion was requested as to the California sales and use tax implications on the acquisition of certain machinery and equipment for a proposed joint venture between A and B. The joint venture will be a corporation and will be owned 50% by both A and B. Orders for long lead-time machinery and equipment have been placed and will continue to be placed in the future. Some of this equipment will be purchased by A from U.S. vendors and some will be purchased by B from foreign vendors.

Since the transaction is neither a "sale" nor a "purchase," the transfer of equipment by B to the joint venture corporation solely in exchange for capital stock would be a nontaxable transfer. That is, the sale to B is the retail sale. It is possible that B could have a California use tax liability with respect to the equipment in question. B would be regarded as having purchased the equipment for use in this state and as having used the equipment in this state if title to the equipment were to pass from B to the joint venture corporation in this state. For California use tax purposes, B would not be regarded as having resold the property in the regular course of its business, but as having disposed of the property in a transaction (the contribution transaction) which was not a sale. Thus, if the ownership transfer occurs in California, B will owe use tax measured by its purchase price of the property. If, however, ownership passes to the joint venture corporation outside this state, that is, if the transfer constituting the contribution occurs outside this state, then B will have no use tax liability because it would not have used or consumed the property in this state. 2/29/84.