(a) Activities
Requiring Seller's Permit.
(1) General. Tax
applies to all retail sales of tangible personal property including capital
assets whether sold in one transaction or in a series of sales, held or used by
the seller in the course of an activity or activities for which a seller's
permit or permits is required or would be required if the activity or
activities were conducted in this state. See subdivision (e) below for special
rules regarding sales of property by producers of hay.
Generally, a person who makes three or more sales for
substantial amounts in a period of 12 months is required to hold a seller's
permit regardless of whether the sales are at retail or are for resale. Each
sale of the person during the 12 month period is included in determining
whether that person is required to hold a permit, or would be required to hold
a permit if the activities were conducted entirely inside this state. Thus, a
sale occurring outside California, whether at retail or for resale, is
included, even though it would not be subject to California sales tax. A person
who makes a substantial number of sales for relatively small amounts is also
required to hold a seller's permit.
Tax does not apply to a sale of property held or used in
the course of an activity not requiring the holding of a seller's permit unless
the sale is one of a series of sales sufficient in number, scope and character
to constitute an activity for which the seller is required to hold a seller's
permit or would be required to hold a seller's permit if the activity were
conducted in this state. If tangible personal property is leased under a lease
which is a "sale" as defined in Revenue and Taxation Code Section
6006
or a "purchase" as defined in Revenue and Taxation Code Section
6010,
tax applies to the lease as provided in Regulation 1660 (18 CCR
1660), and the lessor must hold a seller's
permit as provided in Regulation 1699 (18 CCR
1699). The lessor is not making an occasional
sale since the lessor is making a "continuing sale" and is thereby holding the
leased property in an activity requiring the holding of a seller's permit. As
such, the lessor's sale of the leased property at the end of the lease term is
likewise not an occasional sale.
(2) Property Held or Used in an Activity, or
Activities Requiring the Holding of a Seller's Permit. A seller's permit is
required of a person engaged in the business of selling tangible personal
property. An activity requiring the holding of that permit includes, but is not
limited to, the acquisition and sale of tangible personal property, whether the
person's sales are all at retail, all for resale, or include both sales at
retail and sales for resale.
Acquisition includes the obtaining of the property in any
manner whatsoever. For example, raw materials may be purchased or may be
obtained by extraction from the earth, air or waters of the earth. These may be
sold in raw form or processed or manufactured into other raw materials,
component parts or finished items which are sold. Each of these activities is
an activity which is so related to the sale of tangible personal property, that
it is part of the activity requiring the holding of a seller's
permit.
(3) Separate
Businesses. A person engaged in an activity or activities requiring the holding
of a seller's permit or permits may also be engaged in entirely separate
endeavors which do not require the holding of a seller's permit or permits. Tax
applies to the sale of tangible personal property held or used in the course of
an activity requiring the holding of a seller's permit. Tax does not apply to
the sale of property held or used by the seller in the non-selling endeavors
which do not require the holding of a permit unless that sale is itself one of
a series of sales requiring the holding of a seller's permit. For example, a
person may own a hardware store at one location and a real estate brokerage
business at another location, with no relationship between the two activities
except that of common ownership. Under these circumstances, a sale of furniture
used in the brokerage business would not be a sale of property held or used in
an activity requiring the holding of a seller's permit unless it was one of a
series of sales of the property of the brokerage business. A sale of tangible
personal property held or used in the hardware business would be a sale of
property held or used in an activity requiring the holding of a seller's
permit.
(4) Series of Sales
Requiring the Holding of a Seller's Permit. A person not otherwise engaged in
an activity requiring the holding of a seller's permit may make a series of
sales sufficient in number, scope and character to require the holding of a
seller's permit. The sale in that series of sales, and subsequent sales, during
any 12 month period which resulted in the requirement to hold a permit are
subject to tax, unless otherwise exempt.
(A)
Number.
1. Generally the minimum number of
sales to require the holding of a seller's permit by a person not otherwise
engaged in a selling activity is three within any 12 month period.
2. When calculating the minimum number of
sales which requires a person to hold a seller's permit, the following types of
sales are excluded:
a. Sales made by an
auctioneer on behalf of the person. In such transactions, the auctioneer is the
retailer liable for tax.
b. Sales
through claiming races of horses owned by the person. In such transactions, the
racing association is the retailer liable for tax.
c. Sales of vehicles, mobilehomes, commercial
coaches, vessels, or aircraft which are exempted from sales tax by Revenue and
Taxation Code Sections
6282
and
6283.
d. A trade-in made by the person which is
incidental to a nonselling activity of the
person.
(B)
Scope. The extent of the sales measured by their frequency or dollar
volume.
(C) Character. This relates
to the similarity in type and value giving effect to the taxpayer's operations.
For example, a processor of food products for human consumption is not required
to hold a seller's permit for the processing and sale of food products. Sales
of used lug boxes, obsolete or used machinery, food handling and similar items
are of a character that three or more sales of sufficient scope will require
the processor to hold a seller's permit for this selling
activity.
(5) Examples
Applying the Above Principles.
(A) Service
enterprises which make some incidental sales.
1. Operators of service enterprises such as
hospitals, hotels, theaters, schools, laundromats, car washes, transportation
companies, and trucking companies may make some sales incidental to their
primary service business. A hospital may operate a pharmacy and cafeteria as an
adjunct to the hospital. A hotel may operate a restaurant and a bar. A theater
may sell popcorn to patrons. A school may operate a cafeteria and bookstore. A
laundromat may sell soap to its customers.
If any of these businesses were sold, tax would apply only
to the gross receipts from the tangible personal property held or used in the
selling activity.
2. If, in
any 12 month period, the operator of the service enterprise makes more than two
sales in substantial amounts of tangible personal property used in the service
enterprise, the first two sales are exempt occasional sales, but the operator
is required to hold a permit for the third and subsequent sales during any 12
month period. The gross receipts from the third and subsequent sales during any
such 12 month period are subject to tax, unless otherwise exempt. For example,
the only sales that a service enterprise made were the following sales (each of
which was "substantial" for purposes of this regulation) of tangible personal
property used in the service enterprise:
|
a. |
February 23,
1996 |
Occasional sale |
|
|
b. |
August 16,
1996 |
Occasional sale |
|
|
c. |
January 8, 1997 |
Not
occasional sale |
|
|
d. |
February 8, 1997 |
Not
occasional sale |
|
|
e. |
January 27,
1998 |
Occasional sale |
|
|
f. |
February 3, 1998 |
Not
occasional sale |
|
|
g. |
August 11,
1999 |
Occasional sale |
|
|
h. |
December 12,
1999 |
Occasional sale |
|
|
i. |
September 8,
2000 |
Occasional sale |
|
|
j. |
December 9, 2000 |
Not
occasional sale |
Sales a. and b. are occasional sales since they were the
first two sales made by the service enterprise.
Sales c. and d. are not occasional sales since they were
the third and fourth sales in the series of sales commencing on February 23,
1996, which was less than 12 months prior to these sales.
Sale e. is an occasional sale since it was only the second
sale in the series of sales commencing within the prior 12 months, on February
8, 1997. The January 8, 1997 sale is not relevant since it occurred more than
12 months prior to sale e.
Sale f. is not an occasional sale since it was the third
sale in the series of sales commencing on February 8, 1997, which was less than
12 months prior to this sale.
Sale g. is an occasional sale since the service enterprise
made no other sales in the prior 12 months.
Sale h. is an occasional sale since it was only the second
sale in the series of sales commencing within the prior 12 months, on August
11, 1999.
Sale i. is an occasional sale since it was only the second
sale in the series of sales commencing within the prior 12 months, on December
12, 1999.
Sale j. is not an occasional sale since it was the third
sale in the series of sales commencing within the prior 12 months, on December
12, 1999.
(B)
Other businesses.
1. Tax applies to the sales
of assets of a business which is not essentially a service enterprise. Examples
of this are sales of grocery stores and liquor stores making both exempt sales
of food products for human consumption and taxable sales of other tangible
personal property, service stations which sell gasoline, oil and similar items
and which also perform automotive repairs and lubrication services, and
computer stores which also provide training in the use of computers and repairs
for computer products.
2. Where a
service enterprise and a sales business are operated together so as to
constitute one business, tax will apply to the sale of the assets of the
business. For example, if a car wash and gasoline station are operated at the
same premises and the car wash is available only to persons who buy gasoline or
if the price of the car wash is reduced if gasoline is purchased, tax applies
to the sale of the car wash.
3. A
person purchases a hardware store with the intent of selling tangible personal
property. The person must hold a seller's permit regardless of the number of
sales of tangible personal property actually made. For example, if the person
makes only two sales, a sale of a hammer and a sale of the business, neither
sale is an occasional sale.
4. A
person intends to create and sell custom furniture. The person must hold a
seller's permit for all his or her sales of furniture. This is true even if,
because of the time necessary to create each piece of furniture and the profit
resulting from each sale, the person averages one sale of furniture per
year.
(6)
Transfer of Shares in a Corporation. The sale of stock of a corporation is not
a sale of tangible personal property and is not subject to sales tax. A stock
purchase is not a purchase of tangible personal property and is not subject to
sales or use tax notwithstanding the fact that the stock purchase may be
treated as an asset acquisition for federal income tax purposes pursuant to
Internal Revenue Code Section 338.
(b) Sale or Reorganization of All or Part of
a Business.
(1) General. In general, when a
person sells a business which is required to hold a seller's permit, tax
applies to the gross receipts from the retail sale of tangible personal
property held or used by that business in the course of its activities
requiring the holding of the seller's permit. The gross receipts from the sale
of the business include all consideration received by the transferor, including
cash, notes, and any other property as well as any indebtedness assumed by the
transferee. It is irrelevant that the indebtedness assumed may have arisen
solely in connection with the transferor's acquisition of the tangible personal
property transferred, the other property transferred, or some combination
thereof. That is, the transferor is selling a business, and all consideration
received is for that business. The measure of tax is the price agreed to by the
parties. In the absence of an agreement as to the price of the tangible
personal property, the gross receipts from that sale is allocated among the
taxable portion and the nontaxable portion by dividing the selling price of the
tangible personal property acquired by the purchaser for use rather than resale
by the selling price of the entire business sold, and then multiplying that
amount by the total gross receipts (i.e., all consideration) received for the
business. Book value will be regarded as establishing the price of properties
sold. (See Regulation 1610 for special rules applicable to sales of vehicles,
vessels, and aircraft.)
(2)
Transfers of Substantially All Property Without Substantial Change in
Ownership. Tax does not apply to a transfer of all or substantially all the
property held or used by a person in the course of activities for which the
person is required to hold a seller's permit or permits or would be required to
hold a seller's permit or permits if the activities were conducted in this
state, provided that after the transfer the real or ultimate ownership of the
property is substantially similar to that which existed before such transfer.
"Substantially all the property" means 80 percent or more of all the tangible
personal property held or used by the person in the course of activities
requiring the holding of a seller's permit, including tangible personal
property located outside of this state. If a person engages in two or more
separate selling activities requiring the holding of a seller's permit, for
each of which the person is required to hold a seller's permit or would be
required to hold a seller's permit if the activity were conducted in this
state, a transfer of 80 percent or more of the tangible personal property held
or used in the combined activities must be made in order to qualify for the
exemption described in this paragraph. If a person simultaneously transfers all
or substantially all of its assets to more than one entity, the transfer will
qualify for the exemption if the ownership remains substantially similar.
Stockholders, bondholders, partners, or other persons holding an ownership
interest rather than a security interest in the corporation or other entity are
regarded as having the real or ultimate ownership of the property of the
corporation or other entity.
The real or ultimate ownership is "substantially similar"
to that which existed before a transfer if 80 percent or more of that ownership
of the tangible personal property is unchanged after the transfer. In the
following example, the ownership is "substantially similar" to that which
existed before the transfer:
| Stockholders |
Interest
in Transferor Corporation |
Interest in Transferee
Corporation |
Interests Common Before and
After Transfer |
|
| A.......................... |
40% |
33
1/3% |
|
33 1/3% |
|
| B.......................... |
40% |
33
1/3% |
|
33 1/3% |
|
| C.......................... |
20%
|
33 1/3%
|
|
20%
|
|
|
100%
|
100%
|
|
86
2/3%
|
|
(3)
Statutory Merger. A transfer pursuant to a statutory merger is not a sale but
is instead a transfer by operation of law. Thus, tax does not apply to a
transfer of property of a constituent corporation to a surviving corporation or
new corporation pursuant to a statutory merger under sections
6010-
6022,
1100-
1305, or
15678.1-
15678.9
of the California Corporations Code or similar laws of this state or other
states. The surviving corporation stands in the place of each constituent
corporation (including the disappearing corporation(s)). As a result, if
property acquired by the surviving corporation in the merger had been purchased
and held by the constituent corporation for resale, then the surviving
corporation must report and pay use tax on the constituent corporation's
purchase price if it makes any use of such resale property, just as the
constituent corporation would have owed such tax if it had used the property.
Similarly, if the constituent corporation had avoided paying tax measured by
the purchase price of mobile transportation equipment by making a timely
election to report tax on the fair rental value, the surviving corporation must
continue to report tax measured by the fair rental value on its leases of the
mobile transportation equipment; if the surviving corporation makes any use of
that mobile transportation equipment other than leasing it to another person,
the surviving corporation must report tax on the purchase price paid by the
constituent corporation.
(4)
Contribution to Commencing Corporation, Limited Liability Company, Partnership,
or Joint Venture. The transfer of tangible personal property to a commencing
corporation, commencing limited liability company, commencing partnership, or
commencing joint venture in exchange solely for first issue stock of the
commencing corporation or an interest in the commencing limited liability
company, partnership, or joint venture is not a sale since the interest
received by the transferor is not regarded as having measurable value at the
time of the transfer. The transferor is the consumer of such property. However,
such a transfer is a sale if the transferor receives any consideration, such as
cash, notes, or an assumption of indebtedness (whether or not the transferor
retains any joint liability with respect to the indebtedness assumed by the
transferee), and tax applies to that sale unless it otherwise qualifies for
exemption. For purposes of determining the measure of tax from the sale, it is
irrelevant that any of the transferor's indebtedness assumed by the transferee
may have arisen solely in connection with the transferor's acquisition of the
tangible personal property transferred, the other property transferred, or some
combination thereof. The gross receipts from that sale is allocated among the
taxable portion and the nontaxable portion by dividing the selling price of the
tangible personal property transferred to the purchaser for use rather than for
resale by the selling price of all property transferred and then multiplying
that amount by the total gross receipts (i.e., all consideration) received by
the transferor.
When the transferor is a consumer under the previous
paragraph, no tax applies with respect to the transfer provided the
transferor's use of the property in California would not otherwise be subject
to tax. For example, in the case of property purchased by the transferor for
resale without payment of the tax, the transferor is the consumer of such
property which the transferee will not sell. Since the transferor's use of such
resale inventory is subject to tax, the transferor owes tax measured by its
purchase price. However, no tax applies with respect to the transfer of such
resale inventory provided the transferee will sell such property without any
use other than retention, demonstration, and display while holding the property
for sale. If the transferee thereafter makes any other use of such property, it
must report use tax measured by the transferor's purchase
price.
(5) Dissolution of
Corporation. A distribution of assets, including tangible personal property, by
a corporation upon its dissolution to its stockholders in accordance with their
ownership interests is a liquidating dividend and is not a sale when no
consideration is received by the corporation other than the stockholders'
return of stock certificates for purposes of cancellation. The corporation is
the consumer of such property and no tax applies with respect to the transfer
provided the corporation's use of the property in California would not
otherwise be subject to tax. If consideration is given or received for the
transfer, such as an assumption of liabilities by the stockholders, tax applies
measured by that consideration.
(6)
Dissolution of Limited Liability Company. A distribution of assets, including
tangible personal property, by a limited liability company upon its dissolution
to its members (i.e., persons holding membership interests and persons holding
economic interests) in accordance with their ownership interests is a
liquidating dividend and is not a sale when no consideration is received by the
limited liability company other than cancellation of the members' interests.
The limited liability company is the consumer of such property and no tax
applies with respect to the transfer provided the limited liability company's
use of the property in California would not otherwise be subject to tax. If
consideration is given or received for the transfer, such as an assumption of
liabilities by the members, tax applies measured by that
consideration.
(7) Dissolution of
Partnership. A partnership is a person for sales and use tax purposes. (Revenue
and Taxation Code Section
6005.)
However, a partnership is defined for general law purposes as an association of
two or more persons to carry on as co-owners a business for profit.
(Corporations Code Section 15006.) Dissolution of a partnership is caused by
withdrawal of a partner or admission of a new partner, unless otherwise
provided in an agreement in writing signed by all the partners, including any
such withdrawing partner or any such newly admitted partner before such
withdrawal or admission. (Corporations Code Section 15031(7).)
Under Corporations Code Section 15026, a partner's interest
in the partnership is the partner's share of the profits and surplus, and is
personal property. Under Corporations Code Section 15027(1), a conveyance by a
partner of that partner's interest in the partnership does not in itself
dissolve the partnership, nor, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the partnership, to
interfere in the management or administration of the partnership business or
affairs, or to require any information or account of partnership transactions,
or to inspect the partnership books; but it merely entitles the assignee to
receive in accordance with the partnership contract the profits to which the
assigning partner would otherwise be entitled. The assignment of a partnership
interest in this technical sense is not a sale of tangible personal property
and is not subject to tax.
In common usage, however, the term "partnership interest"
refers to all of the rights of a partner including (1) the person's rights in
specific partnership property, (2) the person's interest (in the technical
sense) in the partnership, and (3) the person's right to participate in the
management. In a typical commercial transaction when a partner "sells the
person's interest in a partnership" to another, it is intended that the person
"selling the interest" will withdraw from the partnership and the person
"purchasing the interest" will be admitted to the partnership. The legal effect
of this transaction is to dissolve the first partnership and to create a new
partnership, in the absence of a provision in the agreement providing for
continued life of the partnership. The effect for sales and use tax purposes is
that there is a dissolution of the partnership, a distribution of the assets on
a pro rata basis, and a sale by the withdrawing partner of the person's
ownership interest in the tangible personal property distributed to that
person. Except as provided in subdivision (c), this sale of tangible personal
property will qualify as an occasional sale under Revenue and Taxation Code
Section
6006.5
and will be nontaxable under Section 6367, unless the withdrawing partner holds
a seller's permit or the sale of tangible personal property is one of a series
of sales sufficient in number, scope, and character to require the holding of a
seller's permit.
A distribution of assets, including tangible property, by a
partnership upon its dissolution to the partners in accordance with their
ownership interest in the partnership is a liquidating dividend and is not a
sale when no consideration is received by the partnership other than
cancellation of the partners' interests. The partnership is the consumer of
such property and no tax applies with respect to the transfer provided the
partnership's use of the property in California would not otherwise be subject
to tax. If consideration is given or received for the transfer, such as an
assumption of liabilities by the partners, tax applies measured by that
consideration.
Where a partnership distributes some of its assets in the
form of a partial liquidation of the business, the transfer will be regarded as
a liquidating dividend, subject to the rules set forth in the previous
paragraph, if an entire segment of the business of the partnership is being
liquidated. For example, a partnership operates a lumberyard and an automobile
repair and parts business. If the partnership ceases operation of the
lumberyard and distributes its assets to the partners in accordance with their
interest in the partnership and the partnership receives no consideration from
the partners such as an assumption of liabilities, the transfer is a
liquidating dividend subject to the rules set forth in the previous paragraph.
If, however, the partnership ceases operating the repair portion of the
automobile repair and parts business and distributes the assets of that portion
of the business, it is not liquidating an entire segment of its business and
the transfer does not qualify as a nontaxable liquidating
dividend.
(8) Dissolution of
Joint Venture. For purposes of this paragraph, a joint venture is an
undertaking by two or more persons jointly to carry out a single enterprise for
profit. The rules applicable to a partnership's liquidating dividends apply to
a joint venture's liquidating dividends. The distribution of assets by a joint
venture will be regarded as a liquidating dividend, subject to the rules set
forth for partnerships, provided at least 80 percent of the purpose of the
joint venture has been completed at the time of the distribution. The
distribution of the assets of a joint venture prior to 80 percent completion of
the purpose of the joint venture cannot qualify as a liquidating dividend and
is a sale transaction subject to tax.
(9) Sale Following Liquidation. Except as
provided in subdivision (c), the transferee's sale of assets acquired in a
transfer qualifying as a liquidating dividend, as discussed in this regulation,
would be an exempt occasional sale if the property is not sold as part of an
activity requiring the holding of a seller's permit and is not one of a series
of sales requiring the holding of a seller's permit.
(e) Producers of Hay. A
producer of hay is required to hold a seller's permit by reason of the
producer's sales of hay, regardless of whether the hay is sold for resale or at
retail, and regardless of whether the hay sold at retail constitutes feed for
any form of animal life of a kind the products of which ordinarily constitute
food for human consumption, unless, operative April 1, 1996, the producer is a
grower who produces hay for sale only to beef cattle feedlots or dairies or is
a grower who sells exclusively through a farmer-owned cooperative.
However, an occasional sale includes a sale of property by
a producer of hay, other than hay, provided that the sale is not one of a
series of sales sufficient in number, scope, or character to constitute an
activity for which the producer would be required to hold a seller's permit if
the producer were not also selling hay.
The producer's sale of tangible personal property held or
used in the course of an activity of producing the hay (such as farm equipment
and machinery) is an occasional sale, provided all of the following conditions
apply:
(1) The sale is not one of
three or more sales of tangible personal property (other than hay) for
substantial amounts in any period of 12 months.
(2) The sale is not one of a substantial
number of sales of tangible personal property (other than hay) for relatively
small amounts in any period of 12 months.
(3) The tangible personal property was not
also held or used in the course of an activity (other than the production of
hay) for which a seller's permit is required, or would be required if the
activity were conducted in this state.
