Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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495.0000 SALE

Annotation 495.0750


495.0750 Transfers of Property. Corporation A is a machine shop with a sole shareholder who also owns 96% of Corporation B. A and B file unitary state income tax returns with the California Franchise Tax Board. B manufactures "packing peanuts" used by merchandisers to protect their products in shipping containers. A manufactures sheet metal overhead storage bins to the specification of various merchandisers who purchase packing peanuts from B so that the packing peanuts can be dispersed through a tube into the packing containers below. A also fabricates and repairs tools, machinery, and equipment that B uses in its day-to-day operations.

The sole shareholder filed his 1986 personal income tax return electing "S" Corporation status for A who filed a separate informational federal income tax return for an "S" Corporation.

A's physical plant is located less than two blocks from B. The day-to-day operations of A's physical plant are supervised by a chief engineer employed by B. B maintains a blanket liability insurance policy for B and A. A maintains separate workers compensation for its employees. A's accounting services are performed by B. A maintains separate bank accounts, pays its own payroll taxes, contracts for supplies and other materials in its own name, issues its own purchase orders, and remits payment for its payroll, facility costs, rents, and other business expenses from its own bank accounts. In issuing purchase orders, A uses its own seller's permit number, issues resale certificates in its own name, and does not identify any purchase of materials or supplies to specific general work orders (GWO) issued by B. A bills B per job based on an agreed hourly cost of labor and the actual material expense incurred to complete each GWO. A's officers and directors do not draw salaries.

A believes that it and B should be treated as a single entity under the holding in Mapo Inc. v. State Board of Equalization, (1975) 53 Cal.App.3d 245, 125 Cal.Rptr. 727 so that its transfer of tangible personal property to B does not result in a sale under section 6006(b).

Numerous facts in this case and many of A's operating procedures closely parallel those in Mapo, Inc. supra, but the underlying facts and circumstances are clearly distinguishable from those in Mapo as follows:

(1) The firm does business with persons other than B.

(2) The firm has an independent business purpose.

(3) The firm is not wholly owned by A.

(4) The firm is not a subsidiary of A. 7/27/90.