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Business Taxes Law Guide—Revision 2024
Sales And Use Tax Regulations
Title 18. Public Revenues
Division 2. California Department of Tax and Fee Administration — Business Taxes (State Board of Equalization — Business Taxes — See Chapters 6 and 9.9)
Chapter 4. Sales and Use Tax
Article 14. Exchanges, Returns, Defects
- 1654 Barter, Exchange, "Trade-ins" and Foreign Currency Transaction
- 1655 Returns, Defects and Replacements
Regulation 1654. Barter, Exchange, "Trade-ins" and Foreign Currency Transaction.
Reference: Sections 6006, 6010, 6011, and 6012, Revenue and Taxation Code.
Exchange in connection with repairs, see Regulation 1546.
Occasional Sales—Sale of a Business, see Regulation 1595.
Reimbursement for tax, effect of collecting, see Regulation 1700.
(a)Barter and Exchange Generally. The terms "sale" and "purchase" as defined in Sections 6011 and 6012 respectively, include exchange and barter, and gross receipts and sales price constituting the measure of tax include the amount allowed by a retailer to his customer for property or services of any kind. Thus, the operator of an "exchange" where customers pay for their purchases of tangible personal property entirely or in part by other property is a retailer and taxable upon his gross receipts, unless his sales are insufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.
(b) Merchandise Traded In.
(1) In General. When merchandise is "traded in" on the purchase price of other merchandise, the retailer accepting the trade-in must include in the measure of tax the amount agreed upon between seller and buyer as the allowance for the merchandise traded in. Should, however, the board find that the allowance stated in the agreement is less than the fair market value, it shall be presumed that the allowance actually agreed upon is such market value.
(2) Discount and Trade-In Allowance on Same Transaction. Although discounts allowed and taken by purchasers are not a part of taxable gross receipts, if there is a trade-in and also a discount, the contract between seller and buyer must make it clear that the parties contract for both a trade-in allowance and for a discount. Otherwise, the amount of the claimed discount will be considered to be an overallowance, and the total sales price will be subject to tax.
(c) Exchange of Commodities.
(1) In General. When commodities are exchanged on a weight or volume basis, each party to the exchange is a seller with respect to the property transferred and a purchaser with respect to the property received. Each sale is subject to sales tax unless it is otherwise exempt, such as a sale for resale or a sale in interstate commerce.
With respect to each retail sale, sales tax is measured by the fair retail market value of the property received in payment for the property sold. The measure of tax includes all charges made to the purchaser, such as storage and handling charges, not expressly excluded from tax by statute.
(2) Determining Fair Retail Market Value.
(A) Simultaneous Exchanges. When the properties are transferred simultaneously, the property received must be valued in money on the date and at the place the property is paid and delivered to the retailer. The date of the contract is immaterial. Actual cost of the property to the transferor or book value of the property for accounting purposes are irrelevant. The measure of tax for use tax purposes is the same as for sales tax purposes.
(B) Successive Exchanges. When properties are transferred successively, each sale occurs when each property is transferred.
Where the obligations of the parties are specified in the contract, the measure of tax for each sale is the fair retail market value of the property on the contract date. The fair retail market value to be used must be the fair retail market value at the place where the property received in payment is delivered to the retailer.
Where the obligations of the parties are not specified in the contract but rather are contingent on future events, i.e., an output or requirements contract, the measure of tax for each sale is the fair retail market value of the property on the date of sale or on the date property received in payment for the sale is delivered to the retailer, whichever occurs first. The fair retail market value to be used must be the fair retail market value at the place where the property received in payment is delivered to the retailer.
(3) Examples.
(A) On January 1, Company A and Company B enter into a contract whereby Company A agrees to deliver 1,000,000 barrels of fuel oil to Company B in Los Angeles on February 1 and Company B agrees to deliver 1,000,000 barrels of fuel oil to A in San Francisco on February 1.
This is a simultaneous exchange. Company A has made a retail sale of fuel oil to Company B on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels of fuel oil in San Francisco on February 1. The value must be the fair retail market value at the place where the property is paid and delivered to the retailer, i.e., San Francisco.
Company B has made a retail sale of fuel oil to Company A on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels in Los Angeles on February 1.
The measure of tax includes all charges made to the purchaser, such as storage and handling charges, not expressly excluded from tax by statute.
(B) On January 1, Company A and Company B enter into a contract whereby Company A is to deliver 1,000,000 barrels to Company B in Los Angeles on February 1 and Company B is to deliver 500,000 barrels in San Francisco on March 1 and 500,000 barrels in Houston, Texas on April 1.
This is a successive exchange pursuant to a contract where the obligations of the parties are specific. Company A has made a retail sale of fuel oil to Company B on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels of fuel oil on January 1 (the contract date). The fair retail market value to be used is the value of 500,000 barrels in Houston and 500,000 barrels in San Francisco on January 1.
Company B has made two sales, one on March 1 and the other on April 1. The sale on April 1 is an exempt sale in interstate commerce. The measure of tax on the March 1 sale is the fair retail market value of the 500,000 barrels of fuel oil in Los Angeles on January 1. (the contract date).
(C) On January 1, Company A and Company B enter into a contract whereby Company A agrees to deliver excess fuel oil to Company B, as such excesses may develop in the future, in exchange for the return of like quantities of fuel oil at times and places mutually to be agreed upon in the future. Company B delivers 600,000 barrels of fuel oil to Company A in Long Beach on February 1, 200,000 barrels in San Francisco on April 1, and 200,000 barrels in Los Angeles on July 1. Company A delivers 1,000,000 barrels to Company B in Los Angeles on March 1.
This is a successive exchange pursuant to an output or requirements contract. The measure of tax is the fair retail market value of the property at the date the property received in payment is delivered to the retailer or the date of sale, whichever occurs first. Company A received an advance payment from Company B of 600,000 barrels delivered in Long Beach on February 1. The payments made by Company B to Company A on April 1 and July 1 are deferred payments on Company A's sale of March 1. The measure of tax with respect to the sale by Company A is the fair retail market value on February 1 of the 600,000 barrels delivered to Company A in Long Beach on that date, plus the fair market retail value on March 1 (date of sale) of the 400,000 barrels to be delivered by Company B in the future at the place where the property is to be delivered.
Company B has made three retail sales; one on February 1, one on April 1, and one on July 1. The measure of tax for the February 1 sale is the fair retail market value on February 1 of the 600,000 barrels to be delivered by Company A in the future at the place where the property is to be delivered. This is a sale with deferred payment, and tax must be reported on an accrual basis. The measure of tax for the April 1 sale is the fair retail market value of 200,000 barrels in Los Angeles on March 1. The measure of tax for the July 1 sale is the fair retail market value of 200,000 barrels in Los Angeles on March 1. The sales on April 1 and July 1 were sales with advance payments and must be valued on the date the property received in payment was delivered to the retailer (March 1).
(d) Foreign Currency Transactions. If a purchaser or seller enters into a contract where the consideration is set forth in terms of foreign currency, tax is measured in United States dollars based on the conversion rate of the foreign currency to United States dollars on the date of the contract.
History—Effective August 1, 1933.
Adopted as of January 1, 1945, as a restatement of previous rulings.
Adopted November 3, 1969, as a restatement of former Rulings 41 (Cal. Admin. Code 1971) and 65 (Cal. Admin. Code 2055), effective December 5, 1969.
Amended May 9, 1985, effective July 18, 1985. Amended title and added subdivisions (c) and (d).
Regulation 1655. Returns, Defects and Replacements.
Reference: Sections 6006–6012, and 6012.3, Revenue and Taxation Code; Sections 1793.2–1793.25, Civil Code; Sections 11713.12 and 11713.21, Vehicle Code.
Barter, Exchange, Trade-Ins, see Regulation 1654.
Auction Sales, agreement not to deliver property or to return amount paid, see Regulation 1565.
(a) Returned Merchandise.
(1) In General. Except as provided in paragraph (2) of this subdivision, the amount upon which tax is computed does not include the amount charged for merchandise returned by customers if, (1) the full sale price, including that portion designated as "sales tax", is refunded either in cash or credit, and (2) the customer, in order to obtain the refund or credit, is not required to purchase other property at a price greater than the amount charged for the property that is returned. Refund or credit of the entire amount is deemed to be given when the purchase price, less rehandling and restocking costs, is refunded or credited to the customer. The amount withheld for rehandling and restocking may not exceed the actual cost of rehandling and restocking the returned merchandise. However, in lieu of using the actual cost for each transaction, the amount withheld for rehandling and restocking may be a percentage of the sales price determined by the average cost of rehandling and restocking returned merchandise during the previous accounting cycle (generally one year). If the seller elects to withhold rehandling and restocking amounts based on a percentage of sales price, the seller is bound by that election for the entire accounting cycle for which the election is made and must apply that percentage in lieu of actual cost during that period on all returned merchandise transactions for which rehandling and restocking costs are withheld. The amount withheld as rehandling and restocking costs may not include compensation for increased overhead costs because of the return, for refinishing or restoring the property to salable condition where the necessity therefore is occasioned by customer usage, or for any expense prior to the "sale" (i.e., transfer of title, lease, or possession under a conditional sale contract).
Sellers must maintain adequate records which may be verified by audit, documenting the percentage used.
(2) Contract Cancellation Options Required by Car Buyer's Bill of Rights.
(A) Contract Cancellation Option. On and after July 1, 2006, the terms "gross receipts" and "sales price" do not include the purchase price for a contract cancellation option agreement with respect to a contract to purchase a used vehicle with a purchase price of less than forty thousand dollars ($40,000), which a dealer is required to offer to a buyer pursuant to Vehicle Code section 11713.21. The purchase price for a contract cancellation option described in this subparagraph shall not exceed:
1. Seventy-five dollars ($75) for a vehicle with a cash price of five thousand dollars ($5,000) or less;
2. One hundred fifty dollars ($150) for a vehicle with a cash price of more than five thousand dollars ($5,000), but not more than ten thousand dollars ($10,000);
3. Two hundred fifty dollars ($250) for a vehicle with a cash price of more than ten thousand dollars ($10,000), but not more than thirty thousand dollars ($30,000); or
4. One percent of the purchase price for a vehicle with a cash price of more than thirty thousand dollars ($30,000), but less than forty thousand dollars ($40,000).
(B) Restocking Fee. On and after July 1, 2006, the terms "gross receipts" and "sales price" do not include the dollar amount of a restocking fee the buyer must pay to the dealer to exercise the right to cancel a purchase of a used car under a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in subparagraph (A) of this paragraph. The dollar amount of a restocking fee described in this subparagraph shall not exceed:
1. One hundred seventy-five dollars ($175) if the vehicle's cash price is five thousand dollars ($5,000) or less;
2. Three hundred fifty dollars ($350) if the vehicle's cash price is more than five thousand dollars ($5,000), but less than ten thousand dollars ($10,000); or
3. Five hundred dollars ($500) if the vehicle's cash price is ten thousand dollars ($10,000) or more.
(C) Amounts Refunded to Customers. On and after July 1, 2006, the terms "gross receipts" and "sales price" do not include that portion of the selling price for a used motor vehicle that is refunded to the buyer due to the buyer's exercise of the right to return the vehicle for a refund, which is contained in a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in subparagraph (A) of this paragraph.
(b) Defective Merchandise.
(1) In General. Amounts credited or refunded by sellers to consumers on account of defects in merchandise sold may be excluded from the amount on which tax is computed. If, however, defective merchandise is accepted as part payment for other merchandise and an additional allowance or credit is given on account of its defective condition, only the amount allowed or credited on account of defects may be excluded from taxable gross receipts. The amount allowed as the "trade-in" value must be included in the measure of tax.
(2) Restitution or Replacement Under California Lemon Law.
(A) General. Under subdivision (d) of Civil Code section 1793.2, if a manufacturer is unable to service or repair a "new motor vehicle," as that term is defined in subdivision (e)(2) of Civil Code section 1793.22, to conform to the applicable express warranties after a reasonable number of attempts, the manufacturer must either replace the motor vehicle or provide the buyer restitution of the purchase price, less specified amounts, at the buyer's election. For purposes of this regulation, the term buyer shall include a lessee of a new motor vehicle.
(B) Restitution. A manufacturer who pays a buyer restitution pursuant to, and in complete compliance with, subdivision (d)(2) of Civil Code section 1793.2 is entitled to a refund of the amount of sales tax or use tax, or sales tax reimbursement included in the restitution paid by the manufacturer to the buyer. The manufacturer may file a claim for refund of that amount with the Board. The claim must include a statement that the claim is submitted in accordance with the provisions of section 1793.25 of the Civil Code. The manufacturer must submit with the claim documents evidencing that restitution was made pursuant to, and in complete compliance with, subdivision (d)(2) of Civil Code section 1793.2 including: a copy of the original sales or lease agreement between the buyer and the dealer or lessor of the non-conforming motor vehicle; copies of documents showing all deductions made in calculating the amount of restitution paid to the buyer along with full explanations for those deductions, including settlement documents and odometer statements; a copy of the title branded "Lemon Law Buyback" for the non-conforming motor vehicle returned by the buyer; and proof that the decal the manufacturer is required to affix to that motor vehicle has been so affixed in accordance with section 11713.12 of the Vehicle Code. The manufacturer must also submit with the claim the seller’s permit number of the dealer or lessor who made the retail sale or lease of the non-conforming motor vehicle to the buyer, and evidence for one of the following:
1. The dealer had reported and paid sales tax on the gross receipts from that sale; or
2. The buyer of the motor vehicle had paid the use tax on the sales price for the storage, use, or other consumption of that motor vehicle in this state; or
3. The lessee of the motor vehicle had paid the use tax on the rentals payable from the lease of the vehicle.
For purposes of this regulation, the number of attempts made to repair the non-conforming motor vehicle, if any, prior to providing the customer restitution is not relevant for purposes of determining whether restitution has been made pursuant to subdivision (d)(2) of Civil Code section 1793.2.
(C) Replacement. For purposes of this regulation, a manufacturer who, pursuant to subdivision (d)(2) of Civil Code section 1793.2, replaces a non-conforming motor vehicle with a new motor vehicle substantially identical to the motor vehicle replaced is replacing the motor vehicle under the terms of the mandatory warranty. No additional tax is due unless the buyer is required to pay an additional amount to receive the replacement motor vehicle, in which case tax is due measured by the amount of that payment. If an amount is refunded to the customer as part of the exchange of the non-conforming motor vehicle for the replacement motor vehicle, then that amount is regarded as restitution for purposes of this regulation if it satisfies the requirements of subdivision (d)(2) of Civil Code section 1793.2. The manufacturer may file a claim for refund under subdivision (b)(2)(B) of this regulation for the amount of sales or use tax, or sales tax reimbursement that is included in the amount of that restitution paid by the manufacturer to the buyer. For purposes of this regulation, the number of attempts made to repair the non-conforming motor vehicle, if any, prior to providing the customer a replacement is not relevant for purposes of determining whether the replacement has been made pursuant to subdivision (d)(2) of Civil Code section 1793.2.
(D) The amount of use tax the Board is required to reimburse the manufacturer shall be limited to the amount of use tax the manufacturer is required to pay to or for the lessee pursuant to Civil Code section 1793.2.
(c) Replacement Parts—Warranties.
(1) In General—Definitions. "Mandatory Warranty." A warranty is mandatory within the meaning of this regulation when the buyer, as a condition of the sale, is required to purchase the warranty or guaranty contract from the seller. "Optional Warranty." A warranty is optional within the meaning of this regulation when the buyer is not required to purchase the warranty or guaranty contract from the seller, i.e., the buyer is free to contract with anyone he or she chooses.
(2) Mandatory Warranties. The sale of tangible personal property includes the furnishing, pursuant to the guaranty provisions of the contract of sale, or mandatory warranty, of replacement parts or materials, and if the property subject to the warranty is sold at retail, the measure of the tax includes any amount charged for the guaranty or warranty, whether or not separately stated. The sale of the replacement parts and materials to the seller furnishing them thereunder is a sale for resale and not taxable.
(3) Optional Warranties. The person obligated under an optional warranty contract to furnish parts, materials, and labor necessary to maintain the property is the consumer of the materials and parts furnished and tax applies to the sale of such items to that person. If he or she purchased the property for resale or from outside California, without tax paid on the purchase price, he or she must report and pay tax upon the cost of such property to him or her when he or she appropriates it to the fulfillment of the contract of warranty.
(4) Deductibles. A deductible paid by a customer under the terms of a mandatory or optional warranty contract is subject to tax measured by the amount of the deductible allocable to the sale of tangible personal property to the customer. For example, if the itemized sales price of tangible personal property (or the fair retail value if not separately itemized) provided pursuant to a warranty is 50 percent of the total fair retail value of the repairs and the deductible is $100, 50 percent of that deductible, $50, would be allocable to the sale of tangible personal property and would be subject to tax, whether the warranty were optional or mandatory. Unless otherwise stated in the warranty contract, when either an optional or a mandatory warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty, the person providing the warranty contract is liable for any tax or tax reimbursement otherwise payable by the customer with respect to that deductible.
History—Adopted August 7, 1957, as restatement of previous Ruling 64 (Cal. Admin. Code 2054), effective September 11, 1957.
Effective August 1, 1933 (Rulings 66 and 67, Cal. Admin. Codes 2056 and 2057).
Adopted as of January 1, 1945, as a restatement of previous rulings.
Adopted November 3, 1969, as a restatement of former Rulings 64 (Cal. Admin. Code 2054); 66 (Cal. Admin. Code 2056) and 67 (Cal. Admin. Code 2057), effective December 5, 1969.
Amended November 5, 1970, effective December 10, 1970.
Amended October 31, 1984, effective December 30, 1984.
First paragraph of (a) revised to provide for withholding of rehandling and restocking costs on basis of average cost and to require retention of adequate records.
Amended November 1, 2000, effective January 18, 2001. Subdivision (b)—current language re-designated (b)(1) and entitled "IN GENERAL." New subdivision (b)(2) added. Subdivision (c)(3)—gender specific language deleted and the phrase "or from outside California" added. New subdivision (c)(4) added.
Amended November 20, 2006, effective April 10, 2007. Added subdivision (a)(2) to incorporate provisions of Revenue and Taxation Code section 6012.3 and Vehicle Code section 11713.21.
Amended April 22, 2014, effective October 1, 2014. In subdivision (b)(2)(A) added “For purposes of this regulation, the term buyer shall include a lessee of a new motor vehicle.” In subdivision (b)(2)(B) and (C) changed “sales tax” to “sales or use tax,” at the beginning of the phrase “sales tax or sales tax reimbursement.” In subdivision (b)(2)(B) changed “board” to “Board”; added “or lease” after “sales” where the subdivision referred to “sales agreement” and after “sale” where the subdivision refers to “retail sale”; added “or lessor” after “dealer” where the subdivision refers to “the buyer and the dealer” and “the seller’s permit number of the dealer”; and revised and reformatted the end of the last sentence in subdivision (b)(2)(B), which previously required a manufacturer, when filing a claim for refund, to include evidence “that the dealer had reported and paid sales tax on the gross receipts from that sale,” to require a manufacturer to include evidence “for one of the following” from a list of proof that: “1. The dealer had reported and paid sales tax on the gross receipts from that sale; or 2. The buyer of the motor vehicle had paid the use tax on the sales price for the storage, use, or other consumption of that motor vehicle in this state; or 3. The lessee of the motor vehicle had paid the use tax on the rentals payable from the lease of the vehicle.” Added new subdivision (b)(2)(D).