California Board Equalization clarifies title transfer location tax

board of equalization

board of equalization

In California, all sales and use taxes are administered at the state level by an agency known as the Board of Equalization. Counties and cities may impose their own sales and use taxes, but the board handles all collection and distribution. The sales tax is assessed on retailers for the privilege of selling tangible goods within California, while the use tax is assessed on purchasers who use or store goods in California without paying any prior sales tax.

The distinction between sales and use taxes matters a great deal to local governments in California. The board allocates sales tax revenues directly to the city where the sale is completed. In contrast, the Board distributes use tax proceeds to a “countywide pool,” which is shared by all the cities and local governments within a particular county.

In 2012, a California Superior  Court judge sided with a group of cities that had sued the board over its distribution policies. Specifically, the cities said the Board improperly classified certain sales taxes as use taxes. Obviously, the cities wanted to maximize the direct distribution of sales taxes to them, as opposed to the indirect distribution of use taxes through the countywide pools.

But in a December 2014 decision, a California appeals court reversed the Superior Court and upheld the board’s policies. The dispute centered on how to classify sales shipped from out-of-state locations to customers in California. Under the board’s rules, sales tax applies when “title transfers to the purchaser in California”; use tax applies in all other cases. The cities argued sales tax should apply “to all transactions negotiated by a retailer in California regardless of where or when title passes.”

The appeals court explained the California legislature failed to define when “title transfers” occur for purposes of classifying a transaction as subject to either sales or use tax. That means the board has the discretion to make that call, provided it does so “in a rational manner” consistent with state tax laws. Here, the board applied theCalifornia Uniform Commercial Code, which states unless a contract provides otherwise, transfer of title occurs at the “time and place at which the seller completes his performance with reference to the physical delivery of the goods.” In other words, title passes when the goods are shipped, not when they are received. So items shipped from out-of-state are therefore subject to use, rather than sales, tax.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

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