Laws, Regulations and Annotations


Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations

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325.0000 Interstate and Foreign Commerce—Regulation 1620

Annotation 325.0612

(c) Shipments from California to Points Outside State

(2) Delivery to Purchaser in State

325.0612 Aircraft Engine Sold to a Foreign Air Carrier. A jet aircraft engine was sold to a foreign air carrier. The sales invoice provided the following information: the engine was shipped FOB to Redwood City, California by a drayage company, the engine was to be shipped by the purchasing air carrier to a European city on an air freight waybill, "payment due upon completion of test cell acceptance," and payment of $625,000 was to be made by a bank to bank transfer (which was done at a later date).

The purchase order from the purchasing air carrier indicates FOB Redwood City for shipment by the purchaser to the European city and it states: "Engine unused and in same condition since previously received from the purchaser. Acceptance of engine after inspection and test cell run in accordance to the PWA overhaul manual at the European city. In case test run negative, purchaser will pay for transportation cost back to owner. Payment terms: cash after successful inspection and test run."

Under the above circumstances, the sale of the engine occurred in Redwood City and not in the European city after the tests performed by the purchaser. For purposes of Sales and Use Tax Law, a sale is any transfer of title or possession, conditional or otherwise, for a consideration. The consideration the seller received for the transfer of possession was the purchaser's obligation to test the engine and pay the seller $625,000 if the engine conformed to the contract.

The only condition to that transfer was that the purchaser pay the sales price or return the engine if it did not conform to the contract. Therefore, the seller sold the engine in Redwood City, when it transferred possession to the purchaser. The purchase order and sales invoice do not provide for passage of title, but even if they did, a retention of title by the seller would be limited in effect to security interest.

The contract in this situation is also not a "sale on approval." If a contract between a seller and a purchaser was a sale on approval, the sale might not be subject to the tax depending on where the sale is determined to have occurred. Commercial Code section 2336 specifically states that "if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is (a)" "sale on approval" if the goods are delivered primarily for use … " The contract in this situation does not permit the purchaser to return the engine regardless of its conformance to the contract. The sales invoice and the purchase order discloses a good faith duty by the purchaser to test the engine and pay the sales price if the engine conforms to the contract. This is not a sale on approval.

Since the sale in this situation occurred in California, it is subject to sales tax unless it conforms to the exemption provided by Regulation 1621. 1/26/87.