Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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495.0000 SALE

Annotation 495.0032


495.0032 "Bill of Usage" Agreement. Customers of a California company require the use of drilling equipment in their offshore operations outside California. The equipment is ordered by and delivered to the customers in California under a "bill of usage" agreement. At this time, no invoice or purchase order is issued, but the customers assume the risk of loss. The customers transport the equipment to an offshore drilling platform and use it as needed. As soon as any of the equipment is used on the platform, the customers issue a purchase order for equipment used and the billing procedure begins. Upon completion of an operation, the customers return any unused equipment to the company. In determining when title passes for sales and use tax purposes, the provisions of the Commercial Code is used primarily. Section 2401 (2) provides that unless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods despite any reservation of a security interest. The only other provisions of the Commercial Code that require consideration are those relating to "sales on approval." However, the language of the sections on "sales of approval" is not consistent with this "bill of usage" agreement. Under the bill of usage agreement, the drilling equipment is not delivered for the purpose of "trial," nor does the agreement contemplate that use or "acceptance" of any of the equipment constitutes acceptance of all of them. These transactions are not "sales on approval" within the meaning of the Commercial Code and that under section 2401 the sales occur when the equipment is delivered to the customers in California. Accordingly, sales tax applies to the sales. 4/23/69.